(Refiles to fix name of EFG in paragraph six)
* Italy seen missing privatisation target for second year
* Politicians reluctant to sell assets as election nears
* Lost revenue could see public debt hit new record high
* Analysts say Italy bond yields may surge without ECB support
By Gavin Jones
ROME, March 29 (Reuters) - Italy’s commitment to selling off public assets is petering out as politicians look ahead to elections early next year, making it harder to cut the country’s huge public debt and leaving it vulnerable to any rise in interest rates.
In late 2015, then-Prime Minister Matteo Renzi said the debt would come down the following year for the first time in eight years, thanks partly to privatisations worth 0.5 percent of gross domestic product.
In the end, the state managed to sell less than a fifth of its targeted amount and the national debt rose to a new high of almost 133 percent of gross domestic product, the highest ratio in the euro zone after Greece.
Renzi confirmed the same privatisation target for this year before he resigned in December after Italians rejected his planned constitutional reform in a referendum, but the prospects for selling state assets have continued to dwindle.
With the ruling Democratic Party (PD) embroiled in a bruising leadership battle and elections slated for early 2018, senior PD members including Renzi himself have recently voiced doubts about whether privatisations are a good idea after all.
“As elections come into sight, privatisations don’t seem to be the government’s focus,” said Gianluigi Mandruzzato, head of economic analysis at BSI, part of EFG International .
The most appetizing items on the government’s slate are the state railway company, which is wholly state owned, and the post office, of which 65 percent remains in public hands after a first tranche was sold in 2015. But it failed to follow up with the sale of a planned second tranche of the post office in 2016, citing unfavourable market conditions.
While the market picture has improved, with the Milan bourse up 5.5 percent this year after falling about 10 percent in 2016, the political will seems to have disappeared.
Infrastructure Minister Graziano Delrio recently admitted to “problems” in selling the railways and Antonello Giacomelli, a junior industry minister, warned of the “dangers” of letting the post office fall into the hands of “foreign investment banks” which could close branches and cut staff.
“Politics has taken precedence over economic concerns and there are no privatisations on the horizon now,” said Stefano Micossi, an economics professor and director general of Assonime, the association of Italy’s listed companies.
“They are unpopular with the unions and politicians who see state companies as a source of jobs and favours to hand out,” he added. “There is enormous resistance from the PD and also inside the government.”
The Post Office, whose top management was changed by the Treasury this month, declined to comment on whether privatisation would go ahead this year.
The state railways is supposed to spin off its high speed and long distance train businesses by July with a view to selling them by the end of the year, but has still not named the advisers for the spin-off.
The company said the privatisation required government legislation, which it was discussing with relevant ministers.
From a numerical point of view, the targeted privatisation revenues can only marginally chip away at the public debt, which the European Commission forecasts will reach a new record high this year.
Mandruzzato said the drift in the privatisation target was “not good news in terms of commitment and credibility.”
Italy has the most sluggish growth in the 19-nation euro zone and an unstable political outlook, and it has repeatedly backslid on promised deficit cuts. The result is that markets have become increasingly leery of its government bonds.
The spread between Italian benchmark bond yields and their safer German equivalent has risen to almost 2 percentage points from 1 percentage point a year ago, and the rise would have been far steeper without the support of the European Central Bank.
Under its “quantitative easing” programme the ECB has been buying several billion euros of Italian bonds every month.
After it cuts back on these purchases, as it is set to do next month, some analysts say the issue of Italy’s debt sustainability may resurface and its yields could surge as they did in 2011 and 2012 at the height of the euro zone debt crisis.
Mandruzzato said the trigger for a sudden market sell-off is often unexpected and in Italy’s case there are “a lot of potential candidates.”
One could be a ratings downgrade, as it was when Standard & Poors cut Italy’s sovereign rating in September 2011. Both Fitch and Moody’s currently have a negative outlook on Italy, meaning a downgrade could be in the pipeline. (Additional reporting by Giuseppe Fonte, Massimiliano Di Giorgio and Francesca Landini; Editing by Hugh Lawson)