Italy defends budget as European Union warns of unprecedented rules breach

League party leader Matteo Salvini speaks at the media after a round of consultations with Italy's newly appointed Prime Minister Giuseppe Conte at the Lower House in Rome Italy

This comes as former chief of the Eurogroup, Jeroen Dijsselbloem, warns that an Italian budget crisis would lead to an "implosion" within the country's banking sector.

The European Commission said Italy's spending plans are excessive and asked for an explanation, the first step in what threatens to become a full-blown standoff between Brussels and Rome.

But he has warned that Italy's populist coalition government was "not scared" of using its veto powers in the European Union as a "last resort" to push the bloc into lifting sanctions against Russian Federation.

At the same time Italy's budget drama continues to exert downward pressure on the euro this morning after European Union officials expressed their opposition to Italy's draft budget in a letter on Thursday.

Moody's said it had downgraded Italy's rating to BAA3, its lowest investment grade, from BAA2 in response to the high level of debt and lack of GDP growth.

The so-called structural deficit, a key measure for the commission, which strips out effects of the economic cycle and one-off spending items, is also off the mark.

The head of one of Italy's two ruling parties says the government won't fall over a dispute on the budget draft, which would offer a tax amnesty to Italians with accounts overseas. The 5-Star movement opposes such a move because it could benefit organized crime or tax cheats hiding money aboard. Di Maio alleges that the draft budget contained unauthorized language extending a tax amnesty to Italians' assets overseas, a measure that the 5-Star Movement says would benefit organized crime or tax cheats hiding money overseas.




Matteo Salvini, the leader of the League party, insists the language was always in the draft but said he was willing to give it up to preserve the ruling coalition.

"We are writing to consult you on the reasons why Italy plans an obvious significant deviation of the recommendations adopted by the Council under the Stability and Growth Pact", EU Commissioners Valdis Dombrovskis and Pierre Moscovici said in the letter, referring to the bloc's fiscal rulebook.

But he also said the commission would not interfere with Italy's choices, saying its role was one of "a referee, not an adversary, of Italy".

The government Tale is projecting a deficit of 2.4% of GDP in 2019, compared to 0.8% for its predecessor, and then to 2.1% in 2020 (compared with 0), and 1.8% in 2021. The effect has been to push values down and the interest rate on government bonds, referred to as the yield, to more than three percentage points higher than safer German bonds. The increase suggests investors are more nervousness about the impending budget showdown with the EU.

Italian Prime Minister Giuseppe Conte says he will visit EU Commission President Jean-Claude Juncker in the near future to discuss the issue.

It cited concerns about Italy's plans for larger deficits and the high public debt load as the country's populist government clashes with Brussels over its budget.

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