ROME Italy will ensure it does not exceed European Union public finance limits while honouring a pledge to pay back 40 billion euros owed to private firms, the outgoing government said on Thursday.
Economy Minister Vittorio Grilli said the repayments would help counter a deep recession while pushing up the deficit forecast to just below 3 percent of gross domestic product, the ceiling set by the EU.
The European Commission expressed concern about the decision, taken last week, for local governments to settle 19 billion euros in debts over the next two years, the health system to pay 14 billion and central government to clear some of its debts.
"This can be thought of as a process by which first of all liquidity is getting to businesses and then to the banks," as the firms could pay back their debts in turn, Grilli told a parliamentary hearing.
He said the deficit would be carefully monitored to ensure it did not break the 3 percent limit.
But Grilli is serving in a caretaker capacity and is unlikely to be in office for more than a few months at most, as the country struggles to form a new government following inconclusive elections in February.
Mario Monti's outgoing government said last week the economy would contract by 1.3 percent this year compared to a previous forecast of -0.2, and hiked the deficit target to 2.9 percent of GDP from 1.8 percent, partly to pay back the firms.
A commission spokesman said the hike in the deficit target had not been agreed with the EU and noted Italy's fiscal gap, which came in bang on 3 percent in 2012, was dangerously close to exceeding the limit.
Grilli said the repayments would prevent a deeper recession. Without it, GDP would shrink 1.5 percent rather than the forecast 1.3 percent, he said.
Following his comments, the Bank of Italy said paying the debts "could improve financial conditions for many companies and could be a way of stimulating economic growth," but also said the deficit must not exceed 3 percent.
BoI economist Daniele Franco told parliament Italy needed decisive and credible economic policies to address the "recessionary spiral" which has seen the economy contract for six consecutive quarters and by 2.4 percent in 2012.
However, both the Bank of Italy and national statistics institute ISTAT said GDP this year may shrink more than the 1.3 percent forecast by the government, which would further weigh on public finances.
The chief economist of the Organisation for Economic Co-operation and Development told Reuters the measure could help the economy as long as debt limits were not exceeded.
"If that money is not given back to companies, the healthy part of the Italian economy will suffer for the wrong reasons," Pier Carlo Padoan said in Paris.
Grilli said he had no knowledge of a possible downgrade of Italy by ratings agency Moody's, rumours of which have troubled financial markets this week, and said paying back the debts to firms should be seen as a positive step by outside observers.
Fellow agency Fitch downgraded Italy's rating this month due to its deep recession, rising debt and political uncertainty after the election.
(additional reporting by Gavin Jones in Rome and Leigh Thomas in Paris. Writing by Naomi O'Leary; Editing by John Stonestreet)