By Valentina Za and Stefano Bernabei
MILAN (Reuters) - Italy's central bank called on Saturday for cohesion as the country battles a government crisis, saying it was imperative to revive growth and reduce a public debt that the coronavirus pandemic has pushed to levels last seen after World War One.
Italy's debt is expected to approach 160% of domestic output at the end of this year, posing a major challenge to an economy which stagnated over the past decade.
"We cannot cultivate the illusion that the public debt can increase indefinitely," Bank of Italy Governor Ignazio Visco told a gathering of financial market participants .
Rome's 2.6 trillion euro ($3 trillion) debt is set to drain almost 60 billion euros from public coffers in interest payments this year alone, despite record low rates.
"Italy must now find the cohesion it needs to return to the path of development," Visco said at the annual Assiom-Forex conference.
Graphic: Italy Debt-to-GDP ratio, https://fingfx.thomsonreuters.com/gfx/mkt/jznvnmygapl/ITALY-DEBT.png
The central banker flagged "very substantial risks" threatening the base forecast of a recovery in output starting in the spring, mainly due to the danger that containing the pandemic proves harder than expected.
As the immediate crisis recedes, Visco said it was important to keep in place support measures for firms and households while making them more selective over time.
After the collapse of a coalition government led by Prime Minister Giuseppe Conte, Italy's President Sergio Mattarella has called on former European Central Bank chief Mario Draghi to form a new government.
Draghi's prospects of securing a majority in parliament advanced on Saturday when the two largest parties, the anti-establishment 5-Star Movement and the rightist League, both gave him their conditional backing.
Visco said Italy could not afford to waste the opportunity provided by the European Union's pandemic response.
Political turmoil is hampering Rome's efforts to draw up plans to spend 200 billion euros in grants and loans from the EU's recovery fund, as an April 30 deadline to submit final proposals looms.
Only by returning to growth rates last achieved before the global financial crisis can Italy reduce its debt without excessively painful budget adjustments, Visco said.
But the "careful and targeted" use of EU funds risks proving insufficient to drive a lasting increase in Italy's economic growth without structural reforms to foster private investment, he said. "This is no small challenge for the public administration." ($1 = 0.8304 euros)