EU budget chief seeks to ease tensions with Italy

Matteo Salvini stands next to a sniper rifle during an event involving the state police SWAT team in Rome

Aimed at fulfilling electoral promises, Italy's planned spending boost is what the government calls its "people's budget", a series of pension and tax changes that will cost 37 billion euros ($43 billion), of which 22 billion will be paid for by expanding the deficit.

Citing Italy's plans to increase spending and its deficit, and allow its government debt to remain elevated, the European Commission said the country is trying to undertake "a particularly serious" breach of the rules. And it means Italy's debt load - which at over 130 percent of GDP is well over the 60 percent limit - will probably not be lowered as promised. "We would therefore ask for your arguments for not taking on board the PBO's opinion", the commission said.

Coming on Thursday, although investors are not expecting any changes to the interest rate they will be listening closely for any details about when the European Central Bank will be wrapping up its bond-buying programme, with any hawkish indications liable to send the Euro higher. "Nor a euro without Italy or Italy without the euro".

European Union sanctions against Russian Federation had caused Italian businesses to lose "billions of euros", Salvini said, calling the trade restrictions "a social, cultural and economic absurdity".

Italy is the Eurozone's third-largest economy, and its budget problems are felt across the bloc to a far greater extent than, for example, the debt problems in Greece back in 2015.

Italy's credit rating was cut by Moody's Investors Service to one level above junk on concerns about the nation's fiscal strength and the stalling of plans for structural reform. Even a default on Italy's debt alone might not be enough to capsize the entire Eurozone - but coupled with a possible "no-deal" Brexit, Italy's brewing crisis could deal significant damage to the euro area. Italian bonds were closed at the time of the announcement.

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Worldwide credit rating agency Moody's late Friday downgraded Italy's ratings to Baa3, with a stable outlook, citing the "material weakening in Italy's fiscal strength" stemming from the revised budget deficits.

The letter was delivered by European Union economics chief Moscovici during a meeting in Rome with Italian finance minister Giovanni Tria on Thursday.

Luigi Di Maio, the head of the 5-Star Movement, said Friday that he was sure a solution would be found, adding "we will hardly let the government fall over an amnesty for whoever launders or self-launders money".

In the morning, Mr. Salvini had assured that the government was not going to be "intimidated by the rating agencies, which have done in the past, errors of judgment, vivid, and who are wrong this time".

Concerns over Rome's expansive budget plans have weighed heavily on Italian government bonds in recent weeks, with the spread between German and Italian benchmark 10-year paper hitting 5-1/2 year highs on Friday.

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