March 12, 2014 / 8:10 PM / 4 years ago

Italy pledges to pay overdue debts to private firms

ROME (Reuters) - Italian Prime Minister Matteo Renzi promised on Wednesday to pay down some 68 billion euros ($95 billion) in overdue debts the state owes to private companies by July, pumping liquidity into the ailing economy.

During his first news conference after a cabinet meeting, Renzi said a draft law outlining the repayment of the debts - along with a sweeping package of tax cuts - was a key part of his government’s plans to pull Italy’s economy out of its longest recession since World War Two.

However, it was evident that the government is not sure how much it owes businesses - or what effect the arrears payments will have on efforts to keep public finances in check.

Renzi said his calculations of how much suppliers of goods and services are owed by public sector bodies were based on a Bank of Italy estimate which put arrears at 91 billion euros as of 2011. But he said the economy ministry wasn’t sure the number was right. The ministry has only officially said that the state had so far paid 22.6 billion euros of its existing debt, but has not given a total figure.

With companies starved of cash, the overdue debts have triggered layoffs, factory closures and even bankruptcies. Freeing up the money is, therefore, seen as an immediate way for the government to buoy the economy.

Paying off the arrears without cashing in a comparable amount of new income could, however, derail Italy’s efforts to steady its finances.

Italy’s deficit is just within the EU’s limit of 3 percent of gross domestic product but its 2.07 trillion euro debt is the highest in the euro zone, as a percentage of GDP, after Greece. It is set to reach 133.7 percent of GDP this year from 132.6 percent in 2013, according to the European Commission.

Renzi has said in the past that Italy will ask for more flexibility on its borrowing targets to revive its economy although he said on Wednesday that it would fully respect borrowing limits.

Last week, EU Commissioner for Economic Affairs Olli Rehn put Italy on a watch list of three countries - with Slovenia and Croatia - citing high public debt and weak competitiveness.

With Brussels taking a hard line, officials say Renzi is waiting until Rome’s term in the rotating EU presidency begins in July and a new European Commission, with a potentially less hawkish view of deficit limits, is in place.

TIMETABLE

In 2012, as part of a “fiscal compact” among EU nations, Rome committed to reduce the amount by which the debt exceeds the EU ceiling of 60 percent of GDP by one twentieth per year, or more than 3 percent of Italy’s GDP.

“It’s certain that Italy is going to ask to renegotiate the timetable for reducing the debt,” said one government source. “Europe isn’t going to give us any extensions at the moment but the Commission will change soon and then we’ll see.”

Action on the commercial arrears cannot wait, however. Last month the EU demanded that Italy take action to cut payment times and comply with EU rules requiring the settlement of bills within 30 to 60 days.

Economy Minister Pier Carlo Padoan said the new draft law on commercial arrears contained measures enabling companies to obtain payment through the state holding company Cassa dei Depositi e Prestiti and commercial banks. The banks would take on claims against the government in return for a limited fee and enjoy a state guarantee.

As well as the money, however, administrative complications mean that companies can struggle to claim payments that are due to them. Under legislation passed last year, suppliers can claim overdue payments only after the debtor state body provides official certification that it owes the money and obtaining such certification can be fraught with complications.

($1 = 0.7212 euros)

Writing by Alessandra Galloni and James Mackenzie; Editing by Ruth Pitchford

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