Moody's downgrades Italy credit rating on debt, deficit concerns

The European Commission's letter said the difference between the expected budget deficit and the one now foreseen was "unprecedented in the history" of EU budget rules, and that it means Italy would be unlikely to lower public debt as promised.

The meeting came as Italy's premier wrapped up a day in Brussels explaining the Italian budget draft to Italy's partners, including the leaders of Germany, France and the Netherlands.

It listed these strengths as Italy's large and diversified economy, substantial current account surpluses of above 2 percent of GDP, a near balanced worldwide investment position and high wealth levels amongst Italian families.

On a visit to Rome, EU Economy Commissioner Pierre Moscovici denied that the commission was already set on issuing an outright rejection of Italy's budget plans, a move that would be unprecedented.

The Italian government has until midday Monday to respond to the European Union letter, which expresses concern about Italy's structural deficit and its high debt level, and seeks more information about Italy's growth outlook from its new populist government.

"I can not imagine a Europe without Italy or Italy without Europe", Moscovici said.

Political analyst Wolfango Piccoli of Teneo Intelligence said the commission is facing a tough dilemma and must walk a fine line with Italy's budget.

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He wasn't the only critic, with former Eurogroup chief, Jeroen Dijsselbloem, warning that an Italian budget crisis would lead to an "implosion" within the country's fragile banking sector.

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.

European Union officials have long signaled it will be hard for the commission not to reject Italy's spending plans if the government's targets remained unchanged, as both the 2019 deficit target at 2.4 percent of output and the so-called structural deficit exceed European Union limits.

There has been a "material shift in fiscal strategy, with significantly higher budget deficits planned for the coming three years compared to earlier expectations", Moody's said.

"Most of the government's spending increases are structural in nature, implying that they will be hard to reverse", Moody's wrote. He told a late-night talk show that the draft budget presented to President Sergio Mattarella's office contained a proposal to extend a tax amnesty on money held overseas and brought back to Italy.

Investors were made even more nervous on Friday by tensions between the ruling League and Five Star Movement (M5S), but the spread fell as those tensions eased in the afternoon.

Rutte said in a statement that he expressed Dutch concerns regarding Italy's budget plans and said he was giving "full support" to the European Commission, which is vetting the draft after having expressed its skepticism.

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