By Catherine Hornby and Giuseppe Fonte
ROME (Reuters) - Italy's caretaker cabinet said on Saturday it would pay 40 billion euros ($52 billion) of the state's debts to private companies over the next 12 months, while vowing to stick within the European Union's deficit limit.
The government approved a decree intended to provide vital liquidity to cash-strapped firms and help tackle a deep recession in the euro zone's third-largest economy. But industry groups said it would still be difficult for businesses to claim their money despite the measures.
The massive backlog of bills owed by Italy's public administration has been a longstanding source of complaint by companies struggling to raise credit from banks facing increasingly tight credit conditions themselves.
Prime Minister Mario Monti said on Saturday that delayed payments to state supplier companies was "an unacceptable situation that has been accepted for a long time".
Monti, who continues to lead a caretaker government after Italy's inconclusive February election, has been in talks with the European Commission, which is concerned about the impact the decree will have on Italy's deficit and its massive public debt.
The measures were originally due to be approved on Wednesday but were delayed due to doubts over how they would be funded.
Monti said on Saturday the government was committed to remaining within the European Union's fiscal deficit ceiling of 3 percent of gross domestic product.
"Economic policy is not changing course, and we don't share the view that to revive the economy you have to create more public debt," he told a news conference.
Last month the government eased its deficit target for this year to 2.9 percent of GDP from a previous target of 1.8 percent, partly to allow the payments to private firms.
The government plans to use new bond issuance to help towards settling the bills. It will ask local authorities to set out a plan of repayment to the central state within 30 years.
"We have to follow a path between the two requirements: to help our economy to recover... and to maintain budget discipline," Economy Minister Vittorio Grilli said. "It's a narrow path but a path that is absolutely viable."
Grilli said the government planned to examine its fiscal performance again in September and the Economy Ministry would be able to adopt corrective measures if the deficit looked likely to breach the "precautionary" limit of 2.9 percent.
PAYMENTS COULD START MONDAY
He said payments to companies could begin as soon as the decree is published officially, expected as early as Monday.
Grilli is due to meet European economics affairs commissioner Olli Rehn in Brussels on Monday to explain the new measures, a government source told Reuters.
Monti said he was hopeful Rome would be able to exit the European Commission's excessive deficit procedure, which imposes corrective measures on countries that exceed the deficit threshold, in May.
Italy has faced weeks in political limbo with no party able to form a government while economic problems pile up.
Public finance data so far this year has not been encouraging, with borrowing in the first quarter higher than the same period of 2012.
The government says settling the bills will provide a sorely needed cash injection for an economy now stuck in its longest recession for 20 years.
But it has proved difficult to find the money to pay the companies, most in the healthcare and construction sectors, which have total accumulated claims estimated by the Bank of Italy at some 90 billion euros at the end of 2011.
Italy will hike its target for government bond issuance in 2013 and 2014 to pay off a portion of the outstanding debts, a senior treasury source told Reuters on Thursday.
Industry groups criticized the decree on Saturday, with small business association Rete Imprese saying the process for companies to be paid was too complicated.
"The proposed mechanism makes it almost impossible for firms to recover what they are owed," said Rete Imprese President Carlo Sangalli.
(Additional reporting by Antonella Cinelli and Giselda Vagnoni; Editing by Jason Webb)
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