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Italy must 'calm down' and stop questioning the euro - Draghi

Italy must 'calm down' and stop questioning the euro - Draghi
FILE PHOTO: European Central Bank (ECB) President Mario Draghi testifies before the European Parliament's Economic and Monetary Affairs Committee in Brussels, Belgium September 24, 2018. REUTERS/Francois Lenoir/File Photo   -   Copyright  Francois Lenoir(Reuters)
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NUSADUA, Indonesia (Reuters) – Italian officials must stop questioning the euro and need to “calm down” in their budget debate as they have already caused damage to firms and households, European Central Bank ECB President Mario Draghi said on Saturday.

Italy’s government has been locked in a war of words with European officials over Rome’s plans to triple the deficit next year, backtracking on a previous pledge to narrow the budget gap in one of the bloc’s most indebted countries.

“A budgetary expansion in a high debt country becomes much more complicated… if people start to put in question the euro,” Draghi told a news conference in Indonesia at the International Monetary Fund’s annual meeting.

“These statements… have created real damage and there’s plenty of evidence that spreads have increased in connection with these statements,” Draghi said. “The results of which is that household and firms pay higher interest rates on loans.”

Italian bond yields rose sharply earlier this autumn after a senior official from one of the ruling parties argued that Italy would benefit from leaving the euro, comments he backtracked on after the market backlash.

“The very first thing (to do) is to calm down with the tone. And then the second thing is we have to wait for the facts,” Draghi said, stressing the need to examine the actual spending plans, which may differ from the government’s communication.

But Draghi also batted back accusations from some corners in the Italian government that the ECB’s own plan to phase out asset purchases by the end of the year had caused the increase in spreads.

Draghi, a former governor of Italy’s central bank, said markets had not reacted in June to the ECB’s decision to end its asset buys but had moved specifically on local Italian issues.

He pointed to the narrowing of the yield difference between Italy and Greece as evidence that the problem is localised.

Since the ECB is buying Italian but not Greek bonds, a bigger rise in Italian yields would suggest that investors are not acting on overall ECB policy change but a local issue.

(Reporting by Francesco Canepa; Writing by Balazs Koranyi; Editing by Shri Navaratnam and Gareth Jones)

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