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WORLD / Wall Street Journal Exclusive

Italy downplays concerns about debt ratings

By GABRIEL KAHN and LUCA DI LEO (WSJ)
Updated: 2006-10-23 17:07

http://online.wsj.com/public/article/SB116157004693700582-LhLXQPZwGasjHEn20
uOEqTrSsuk_20061030.html?mod=regionallinks

ROME -- Despite international concerns about the Italian economy, Finance
Minister Tommaso Padoa-Schioppa brushed off recent downgrades of the
country's debt and said the coming budget bill would do much to fix
Italy's twin ills of slow growth and bloated public spending.

In an interview, Mr. Padoa-Schioppa said downgrades to Italy's sovereign
credit rating -- to A+ from Standard & Poor's and AA- from Fitch Ratings
last week -- were both based on out-of-date assessments. Ratings agencies
are limited in their ability to accurately understand Italy's situation
because few analysts who work at the companies speak Italian, said Mr.
Padoa-Schioppa, a former European central banker.

"I don't welcome these [downgrades], but I would not say it makes my job
more difficult because they were widely discounted by the market and
myself."

Standard and Poor's downgraded Italy's debt to A+ with stable outlook
from AA-. Fitch downgraded to AA- with stable outlook from AA.

Instead, the minister said the budget bill he drafted, which must be
approved by Parliament by the end of the year, marks a crucial step
toward improving the economy and getting credit ratings back up. "With
this budget, we have eliminated the risk of being left behind," Mr.
Padoa-Schioppa said, noting, however, that "more time and more measures
are needed to reach the front of the group of runners."

The European Union has a lot riding on Mr. Padoa-Schioppa's ability to
turn around Italy's finances. Italy, the seventh-largest economy in the
world and the third-largest in the euro zone, has been among the worst
performers in the EU over the past 10 years, dragging down overall growth
on the continent. At the same time, its debt -- now at 108% of gross
domestic product -- is highest among the 12-nation euro zone and is
rising again after shrinking for a decade.

Italy's debt has made it the weak link in the monetary union. Coupled
with its slow growth rate, the country is increasingly out of whack with
the euro zone, meaning that it is straining more than others under the
common monetary policy set by the European Central Bank. That has begun
to hurt broader confidence in the monetary union.

Criticism of the budget bill has risen since the draft was approved by
the government at the end of last month. The budget aims to raise ��5
billion ($44.17 billion) through revenue-generating measures and spending
cuts.

Rating agencies, business groups and Italy's central bank have criticized
the bill for relying too heavily on new tax revenue to bring the deficit
in line with EU budget rules and for being too timid in tackling waste in
Italy's public spending, which accounts for about 50% of all economic
activity.

"Criticisms of the budget are not based on an accurate reading of the
facts," Mr. Padoa-Schioppa said. He said only �� billion in this budget
comes from new taxes, while more than �� billion will be generated from
measures to improve tax collection and fight tax evasion.

Rating agencies say his prediction of recouping money from tax evasion --
a problem that has bedeviled Italian governments for decades -- is
unrealistic.

Though he acknowledged that increased revenue-generating measures in his
budget could slow Italy's growth rate next year slightly, he said the
long-term benefits of bringing public finances under control would
greatly improve the overall economy. Most importantly, he said, the
budget would put Italy's deficit, expected to total 4.8% of gross
domestic product this year, on track to return within the 3% ceiling set
by the monetary union by 2007.

The EU has been the only authoritative voice to speak in favor,
provisionally, of the Italian budget so far.

As Mr. Padoa-Schioppa spoke, Finance Ministry employees gathered in the
ministry's courtyard and protested -- with whistles, horns and flags -- a
measure in the budget that is aimed at reducing the number of Finance
Ministry offices. "I know much better now how hard it is to reduce
spending than I did five months ago," he said.

Public protests against the budget and other economic measures passed by
Prime Minister Romano Prodi's center-left government, which took office
in May and holds a razor-thin majority in Parliament, are increasing.
Thousands of self-employed workers took to the streets last week, and
bigger demonstrations against the budget are slated for later this month.

Though criticism of the budget is straining relations within Mr. Prodi's
fractious eight-party coalition, Mr. Padoa-Schioppa said he was confident
the budget would be approved by Parliament without significant changes.

Once the budget is approved, Mr. Padoa-Schioppa said his main objective
would be to reach an agreement with the country's labor unions early next
year on getting Italians to work longer. Italy's aging population and
generous state pension system have contributed to making it the most
indebted country in the euro zone.

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