By Giselda Vagnoni
ROME (Reuters) - Italy needs to respect its fiscal targets if it wants to retain the confidence of investors over its capacity to repay its debt, Bank of Italy governor Ignazio Visco said on Saturday, as Rome faces a budget tussle with Brussels.
"Surely, trust in Italy also depends on the ability to meet targets and not to change them," said Visco at a conference in Venice, adding that "trust in public debt (reimbursement) must be sought with every effort".
Italy is negotiating a budget revision with Brussels to try to prevent EU disciplinary measures.
The European Commission wants Italy to reduce its debt this year and next and has opposed the wide tax cut plans of the ruling coalition if they are not offset by new revenues or spending reductions - options that Rome has so far dismissed.
In remarks that may complicate talks with the Commission, Italy's Deputy Prime Minister Matteo Salvini on Friday threatened to resign and bring down the government unless he can push through at least 10 billion euros ($11.37 billion) of tax cuts.
Visco, who did not mention Salvini or any other politician specifically, also warned about "fuelling the fear" of Italy breaking away from Europe if the government defies Europe over its budget and supports anti-EU policies.
"Markets insure themselves against this risk by demanding various basis points of higher interest rates" on Italian debt, he said.
'THE DEFICIT NIGHTMARE'
With a debt of 2.3 trillion euros, Italy is viewed by most economists as too big to fail, and financial instability there could endanger the stability of the entire euro zone.
Italy's 10-year benchmark bond yields were 245 basis points over the equivalent German paper on Friday. In October they spiked to over 340 basis points after the EU rejected the government's 2019 budget.
A compromise defused the crisis - but another showdown between Rome and Brussels would send these premiums soaring again.
The EU Commission fears that a significant tax cut next year might boost Italy's debt pile, the euro zone's second biggest in proportion to output after bailed-out Greece.
The Italian economy cannot grow if it has to "live with the nightmare of the country not being able to contain its budget deficit," Visco said.
Italy's ruling coalition, made up of the anti-establishment 5-Star Movement and the right-wing League, has drawn up a bill aimed at giving the government and parliament the right to name the central bank's five-member board, ending the current system by which appointments are made mainly internally.
The draft bill is likely to increase long-running tensions between the Bank of Italy and the government.
On Saturday, Visco urged the legislators to treat the issue "seriously and carefully".
"More important than the independence of the central bank is its autonomy of judgment, whether those who work at the Bank of Italy are free to exercise their judgment," he said.