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Italy delays balanced budget by 2 years

The Italian government warned Wednesday that a deeper-than-expected recession means it will miss its pledge to balance its budget by 2013 by two years.

Italian Prime Minister Mario Monti's administration projects that the country's 2013 deficit will be 0.5 percent of GDP in 2013, and 0.1 percent of GDP the next year. It now expects to balance the budget by 2015.

The economic and financial forecasts, which were approved by the Cabinet in Rome, also say that the economy will shrink this year by 1.2 percent, more than previous projections of a 0.4 percent contraction.

The new document projects that public debt will peak at 120.3 percent of GDP in 2012 before easing to 117.9 in 2013.

Italy's enormous debt load pushed up the country's borrowing costs on the international debt markets to dangerous levels last year, before easing back thanks to European Central Bank's program of offering €1 trillion ($1.31 trillion) in low-interest loans to Europe's banks, which helped lenders buy up their governments' debt and drive down borrowing costs.

Former Prime Minister Silvio Berlusconi last summer announced cuts aimed at balancing the budget by 2013 after Italy's borrowing costs spiked. But Monti's government, which took office in November, said the economic climate had deteriorated since December, requiring a revision of the estimates.

There was no immediate comment from other European capitals on Italy's acknowledgment that the balanced budget target would fall.

Economist Raj Badiani with IHS Global Insight said the deficit numbers Italy expects to carry before 2015 were relatively low, and therefore not highly significant. He said it was important for Italy to build up a large primary surplus to help pay down debt — Italy's main economic weak point. The government put the primary surplus at 3.6 percent this year, rising to nearly 5 percent in 2013.

"The important thing is that the deficit is going to be below 3 percent. Whether it is balanced in 2013 is neither here nor there. When Berlusconi gave that promise, the economic outlook was a lot firmer," Badiani said.

Italy's own outlook was less gloomy than one put out by the International Monetary Fund Tuesday, which says Italy won't balance its budget until at least 2018.