Italy’s finance minister has failed to halt growing concern over Italy’s budget plans as the country’s borrowing costs rose to new four-year highs despite assurances that Rome wanted to calm tensions with investors and with the EU.

Speaking to Italian lawmakers, Giovanni Tria said the populist coalition would not deviate from plans to widen the country’s deficit to sharply increase spending.

While Mr Tria said he was concerned by Italy’s rising borrowing costs and vowed to try to assuage market fears, he told lawmakers in Rome that a sharp increase in spending was needed to help economic growth.

Italy’s government borrowing costs hit new four-year highs, with the benchmark 10-year bond yield climbing as much as 20 basis points — 0.2 of a percentage point — to 3.712 per cent.

Spreads between Italian 10-year bonds and German Bunds — seen as a proxy for the risk premium demanded to hold Italian paper — hit 316 basis points, up from 302.6bp on Monday’s close and 224bp a month ago.

Italy is entering a critical period of dialogue with EU officials, with lawmakers in Rome set to vote on the government’s draft budget plans this week, before sending them to the European Commission for review at the start of next week.

Brussels has already raised tensions with Rome by warning that Italy’s plan to lift the budget deficit to 2.4 per cent of GDP next year is likely to breach eurozone spending rules.

The Bank of Italy also highlighted its own concerns with the government’s budget plans. Luigi Federico Signorini, its director-general, warned Italian lawmakers of a potential “vicious circle” that could lead to higher debt service costs that would have repercussions for the economy.

But as Mr Tria started to try to win lawmakers’ backing for the budget plans, he said Italy needed to act to change its economic course.

He said the gap between its recovery and the stronger rebound achieved by other eurozone members was “unacceptable 10 years from the crisis”.

“Past growth rates have not allowed for debt reduction,” Mr Tria said, confirming the populist coalition government’s proposal to run a budget deficit of 2.4 per cent of GDP for next year.

Mr Tria said the government would act if Italian government borrowing costs rose too sharply and urged calmer dialogue with Brussels.

“We are now entering a period of constructive discussion with the commission which will be able to assess the well-founded reasons for the government’s growth strategy outlined in the plans,” he said. “In this constructive discussion I want to declare my agreement . . . on the need to calm the tone.”

Underlining Brussels’ concerns, European Commission Vice President Jyrki Katainen said on Tuesday that Italy’s situation was vulnerable.

“The commission expects more details….. but we are concerned that Italy will present totally unrealistic fiscal targets or growth projections, and that negotiations will prove very difficult,” he told reporters in Helsinki.

Mr Tria identified 400 bps as a point at which the Italian government would “take action” to ease financial conditions.

On Monday Matteo Salvini, deputy prime minister and leader of the hard right League Party, denied Italy would face a crisis if its borrowing costs continued to rise. “Nobody thinks that we will end up like Greece, absolutely not,” he said.

Chiara Silvestre, an economist at UniCredit, said that “the tone of the discussion with Europe” was an important driver of the moves in yields.

“While there are many possible paths with respect to how the European Commission and the Italian government will carry on their discussion, it is unlikely that the government will back off before significant market pressure materialises,” she said.

Short-dated Italian bond yields were up between 4 and 6 basis points across the curve during afternoon trading. The 5-year yield reached a session high of 3.131 per cent and the 2-year hit a high of 1.975 per cent after closing at 1.552 on Monday.



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