Italy defence drive could derail debt, hit ratings

MILAN, April 4 (Reuters) - Italy's pledges to increase defence spending to help Ukraine could scupper government efforts to rein in the mammoth public debt, analysts say, posing a threat to the creditworthiness of the euro zone's third-largest economy.

A European Union drive to hike military expenditure, in response to the Trump administration's moves towards a rapprochement with Russia and warnings that European security can no longer be its primary focus, is set to strain budgets around the bloc.

Italy, however, with its extremely low defence spending, heavy debt load and the euro zone's highest borrowing costs, is in a particularly difficult position.

Rome currently spends around 1.5% of gross domestic product on defence, one of the lowest levels in the EU alongside Spain, Portugal and Belgium.

Raising that to 3% over the next four years, as urged by the European Commission, would mean finding an extra 30-35 billion euros ($38 billion), either through extra borrowing or spending cuts.

It is a tough choice that will be closely watched by financial markets and credit ratings agencies focused on the trajectory of the euro zone's second-largest public debt pile.

"If this additional expenditure is financed through new debt issuance, it would weigh on Italy's already strained fiscal outlook," said Eiko Sievert, executive director at Scope Ratings.

Italy faces more than a month of ratings reviews by all the main agencies, beginning with Fitch on Friday.

Until recently, Rome harboured hopes of upgrades, but these have been dimmed by a weakening economy and the risk of a defence-driven rise in its ...
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