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Italy's public debt may exceed government target, central bank warns

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Italy's public debt may exceed government target, central bank warns

Italy's public debt level may rise more than what the government has forecast for 2019, the country's central bank said, urging Rome to lay out plans to cut down its borrowing.

Banca D'Italia SpA said the increase in Italy's debt-to-GDP ratio could exceed, by nearly half a percentage point, the projected rise indicated in the government's budget.

In April, Rome raised its debt level forecast for 2019 to 132.6% of GDP, compared to the 132.2% recorded in 2018.

Central bank Governor Ignazio Visco said May 31 that the country's high public debt level remains a "severe constraint" and that "there must be no delay" in setting out a plan to reduce it in the medium term.

"The tensions in Italy's government bond market are curbing growth prospects," Visco said, referring to a higher yield on 10-year bonds and a widening spread with respect to the equivalent German bonds.

Visco also warned that increasing the public deficit to provide "temporary relief" for the economy could be "less than effective, even counterproductive" if it weakened financial conditions and confidence among households and businesses.

"The risk of a 'restrictive expansion' must not be underestimated," Visco said.

Italy's budget deficit in 2018 narrowed to 2.1% of GDP from 2.4% in 2017.

The central bank's warning comes amid renewed tensions between Italy and the European Commission, which has given Rome until May 31 to explain the deterioration in its public finances.

Italian Deputy Prime Minister Matteo Salvini has reportedly said the 2020 budget would fuel "a positive fiscal shock," having previously hinted at the willingness to breach the EU's fiscal rules to curb unemployment.

Luigi Di Maio's 5-Star Movement will support national coalition partner League's flat tax proposal, which would increase Italy's budget deficit, Bloomberg News reported, citing a person familiar with the situation. This comes a day after Salvini said he was willing to end his alliance with the 5-Star Movement if his national coalition partner opposed his proposed fiscal measures.