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* S & P estimates that government plans are bad for GDP growth and debt reduction
* S & P estimates higher debt yields could reduce bank lending
* PM of Italy does not approve any ranking changes (Addition of details, background)
By Gavin Jones
ROME, Oct 26 (Reuters) – Standard & Poor's left Italy's sovereign debt rating unchanged, but kept its negative outlook stable, saying the new government's plans weighed on the country's growth and prospects for debt .
S & P has left the rating at BBB, two notches above the junk, which will relieve the government, which is fighting against the European Commission on its 2019 budget and that Moody's debt has been reduced last week.
S & P has, however, been sharply criticized, saying that the budget deficit next year would exceed the Rome target and that public debt would not decline as expected.
"The economic and fiscal policy parameters of the Italian government weigh on the country's economic growth prospects, a determining factor in the government's debt-to-GDP trajectory," S & P said.
"In our view, the government's economic and fiscal policy has eroded investor confidence, as evidenced by the increase in public debt yield," he said, warning of potential problems for investors. banks of the country, which hold a large amount of Italian state bonds. .
If sovereign bond yields of banks continue to rise, this could reduce their ability to finance the economy, said the rating agency.
The European Commission rejected Tuesday Italy's draft budget for 2019 and asked Rome to submit a new budget within three weeks.
The budget targets a budget deficit of 2.4% of gross domestic product next year, compared to 1.8% this year, which is contrary to the EU's obligation to gradually reduce the deficit towards fiscal balance.
"VERY OPTIMISTIC"
S & P has forecast a budget deficit of 2.7% of GDP for 2019 and announced that the huge Italian public debt, which stood at 131.2% of GDP last year, remain stable at around 128.5% for the next three years.
The coalition government's forecasts for economic growth of 1.5% next year and 1.6% in 2020 are "overly optimistic" and raise its own forecast to 1.1%, compared with 1.4% for both years.
"We expect that stimulating demand through government budget measures will likely be short-lived," S & P said.
Deputy Prime Minister Matteo Salvini called the S & P report "the same old film" and questioned the credibility of rating agencies that "did not notice the financial crisis".
Prime Minister Giuseppe Conte said that the fact that the agency left the note of Italy unchanged was "correct given the economic strength of our country."
Earlier Friday, Salvini said the government would not come back on the budget "even by half a millimeter", echoing a message voiced by other coalition ministers who took office in June.
S & P was particularly interested in the government's plan to reduce the retirement age, saying that if fully implemented, this policy would "threaten the long-term sustainability of public finances".
On the positive side, he said that Italy "continued to be supported by its rich and diversified economy and by its strong external position, its economy being on the brink of becoming a net creditor in the context of its overall investment position in net investments ".
S & P said not to expect the government to question Italy's accession to the eurozone.
This question has often been raised because of the Eurosceptic opinion of some prominent members of the coalition, despite the government's regular assurance of not intending to leave the single currency. (Report by Gavin Jones, edited by Hugh Lawson and Leslie Adler)
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