November 16, 2016 / 6:41 PM / 2 years ago

Italy won't bend budget plan for EU, says Renzi advisor

LONDON (Reuters) - Italy will not bend its budget plans to meet European Commission demands, an economic adviser to the country’s prime minister Matteo Renzi said on Wednesday.

Italy's Prime Minister Matteo Renzi talks to the media as he leaves a European Union leaders summit in Brussels, Belgium, October 21, 2016. REUTERS/Francois Lenoir

Yoram Gutgeld, who has been in Renzi’s inner circle since he took the reins in 2014, also said he expected the government to win a constitutional referendum on Dec. 4 and to seal a 5 billion euro recapitalization of troubled bank Monte dei Paschi di Siena.

Italy and five other countries are at risk of breaking European Union budget discipline rules with their 2017 draft budgets, the European Commission said on Wednesday, raising the risk of an uncomfortable few months of wrangling ahead.

“We are not going to change our budget. We are confident that there won’t be any problems,” Gutgeld told Reuters.

“We will explain exactly what the numbers are and we are confident that this will be understood and appreciated.”

Italy’s structural deficit, which excludes one-off items and economic cycle swings in income and spending, has been rising every year since 2014 and is forecast to jump to 2.2 percent in 2017 and then further to 2.4 percent in 2018.

That goes clearly against EU rules which say countries must cut their deficit by at least 0.5 percent of GDP every year until they get it back to zero, though Rome argues its breaches are mainly due to the costs of processing refugees and rebuilding parts of the country hit by earthquakes.

The economy rebounded slightly more strongly than expected in the third quarter after stagnating in the previous three months, data showed this week.

“The numbers confirmed our growth is improving, although it is still unsatisfactory for us,” Gutgeld said.

“We predicted growth of 0.8 percent for the year and we already have 0.8 percent on the books so if we get additional growth next quarter we may do a little better (than expected).”

Gutgeld said next month’s constitutional referendum was one of the reasons why Italian borrowing costs were rising in bond markets. He urged voters not to make Renzi the focus of the vote, but to decide on the proposed reforms. Renzi has staked his political future on the outcome.

The polls have been making increasingly grim reading for Renzi in recent weeks but Gutgeld said they had been proved wrong in Italy before.

“Before the European elections in May 2014, a few days before the polls said the Partito Democratico (Democratic Party) and the (Beppe) Grillo movement were head-to-head, all the polls predicted around 30-30 percent of the vote and it ended up 41-20 so I wouldn’t put too much focus on the polls.”

He also touched on the country’s most troubled bank, Monte dei Paschi (BMPS.MI), which plans to sell some 28 billion euros ($30 billion) in bad loans and raise 5 billion euros in new capital to repair its battered finances.

The rising pressure on Italy’s financial markets though has been feeding doubts.

“We are hopeful that the plan will go through,” Gutgeld said. “We think it’s a good plan and obviously there is an important set of institutions that are committed to getting that deal through,” he said.

Reporting by Marc Jones; Editing by Toby Chopra

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