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Italy Could Use Gucci Tax Deal in Bid to Avoid EU Penalty

What’s more Italian, high fashion or high debt? One could be the key to resolving the other, Italy’s government is expected to say, after it came under pressure for the state of its finances.

With the European Union firing a warning shot at the country for running up debt so high it could lead to a multi-billion-euro penalty, Rome may cite revenue deriving from a top luxury brand as evidence it can get its house in order.

A 1.25 billion-euro ($1.4 billion) payment by Kering SA to end a dispute over Italian subsidiary Guccio Gucci SpA’s back taxes could be a key part of Rome’s response to the EU’s request for an explanation, people familiar with the nation’s public accounts said.

Italian bonds declined on Friday, pushing yields on the nation’s 10-year debt back above 2.7 percent. The premium over German bunds, Europe’s benchmark, is at the widest in almost six months.

In a letter Wednesday, the European Commission said it’s considering whether to propose a disciplinary procedure which could lead to a 3.5 billion-euro penalty. But the deal with Kering could allow the Rome-based government to say it’s making progress in coming to grips with a debt load amounting to over 132% of the nation’s economic output.

The treasury is weighing citing the Gucci tax settlement along with an improved economic outlook, spending cuts as well as revenue from future privatizations, said the people, who asked not to be named citing the confidential nature of the reply letter.

Finance Minister Giovanni Tria will also maintain in his reply to the EU that the country’s debt is manageable and sustainable, daily la Repubblica reported on Friday.

Separately, Corriere della Sera reported the finance minister’s letter will reiterate the need for growth-friendly policies and the willingness to sell state assets to reduce the debt load.

Reporting by Lorenzo Totaro.