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Italy's Letta under pressure to pay company bills

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(Globalpost/GlobalPost)

By Giuseppe Fonte

ROME (Reuters) - Italian Prime Minister Enrico Letta came under pressure on Thursday to start clearing a multi-billion-euro backlog of bills the state has racked up with companies as the price of preserving his uneasy coalition.

The government owes companies tens of billions of euros in overdue payments, which if met would add an extra burden to the country's already shaky finances.

But a government source said Letta conceded he would try to speed up the process during a meeting he called to ease coalition tensions, after the centrist Civic Choice movement threatened to withdraw support if economic reforms were not stepped up.

Deputy Prime Minister Angelino Alfano, secretary of the center-right People of Freedom (PDL) of former prime minister Silvio Berlusconi, tweeted that his party had pushed during the meeting "to reduce public debt in order to lower taxes and immediately pay state debts to companies."

The coalition has faced difficulties from the moment of its inception in April, with relations between the PDL and Letta's center-left Democratic Party particularly strained.

With Italy, the euro zone's third largest economy, in its longest recession since World War Two, Letta can ill afford major splits.

Its borrowing costs are creeping higher as the rising political tensions add to nerves on financial markets also looking anxiously at ministerial resignations in Portugal and an ultimatum served on Greece by its international lenders.

But clearing the overdue bills might further antagonize investors, given Italy's public debt of more than 130 percent of gross domestic product and a budget deficit that widened further in the first quarter.

CLIMATE OF SUSPICION

The government source said the coalition partners will meet again in a fortnight to discuss the reform of an unpopular housing tax, IMU, which has been a rallying cry of the PDL.

Scrapping IMU would leave a 4 billion euro ($5.19 billion) hole in an already strained budget. The government earlier suspended IMU payments due in June and promised to overhaul the property tax system by the end of August.

For the moment, there is little expectation of a return to elections, not least because the result would almost certainly be another deadlocked parliament.

Letta has pledged to ease the severe austerity policies pursued by predecessor Mario Monti's government and cut a youth unemployment rate of around 40 percent, while respecting the tight spending limits imposed by European Union budget rules.

Economy Minister Fabrizio Saccomanni has announced plans for a review of public spending but admitted on Wednesday that major cuts would require tough political decisions and, in the short term, the room for maneuver was limited.

The climate of suspicion between the PD and PDL in particular has held up any more ambitious efforts to tackle the structural problems that have made Italy one of the world's most sluggish economies for more than a decade.

A bruising series of legal verdicts against Berlusconi, who is now fighting two prison sentences as well as a ban on public office and expulsion from parliament for tax fraud and sex offences, has added to the uncertainty.

Saccomanni told parliament on Wednesday speeding up the payments to companies would help the economy to recover and increase sales tax revenues.

Late payment by public authorities to private suppliers has been a source of bitter complaint from companies facing growing difficulty obtaining credit from banks.

The state took an average of six months to settle bills from private firms last year, the longest in the European Union, according to business group CGIA Mestre.

The government has already agreed to settle 40 billion euros ($50 billion) of arrears over the next two years but the center-right of the ruling coalition wants payments concentrated in the second half of 2013 so they can have more impact on the economy.

($1 = 0.7709 euros)

(Additional reporting By Naomi O'Leary and Giuseppe Fonte; editing by Steve Scherer, John Stonestreet)

http://www.globalpost.com/dispatch/news/thomson-reuters/130704/italys-letta-under-pressure-pay-company-bills