UPDATE 2-Bank of Italy says country needs cohesion to grow and cut debt

* Italy needs to grow like it did before 2008 crisis

* Use of EU funds without reforms won’t be enough

* Debt cannot grow indefinitely (Adds comments, detail)

MILAN, Feb 6 (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 the annual Assiom-Forex conference.

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.

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.

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.

But the country’s largest parties are still weighing whether to support him, with mutual vetoes blocking his way to power.

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. Member states are due to submit final proposals by April 30.

Only by returning to growth rates it 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)

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