Italy to Speed Up Austerity Measures

Government’s moves may pave the way for ECB purchases of Italian bonds.

Prime Minister Silvio Berlusconi, seeking to prevent Italy from becoming the next victim of Europe’s debt crisis, vowed to balance the budget and impose austerity faster than planned as investors flee Italian bonds.

The moves may pave the way for the European Central Bank to try to bring down Italy’s borrowing costs by buying its bonds in secondary markets. The ECB yesterday said it would renew its bond-buying program, and council member Luc Coene said today the lender was ready to act as soon as governments “take steps.”

“We are facing a very difficult situation in financial markets that requires a coordinated intervention by various states, above all the nations that share the euro,” Berlusconi said at a press conference in Rome.

Italy will adopt a balanced-budget amendment, liberalize its labor market, and consider asset sales, Berlusconi and Finance Minister Giulio Tremonti said in a joint press conference in Rome today.

While yields on Italian and Spanish debt fell today, borrowing costs have surged since a July 21 European Union summit approved a new aid plan for Greece and measures to aid other euro-region countries before they need a bailout. The plan failed to end contagion from Europe’s debt crisis to the euro zone’s third- and fourth-largest economies.

 

Record Yield
Italian 10-year bond yields are up 76 basis points since the summit, while Spanish yields have gained 33 basis points. The difference between the yield on 10-year Italian bonds and similar German securities reached 416 basis points today, a record since the adoption of the single currency. The spread ended the trading day at 374 basis points.

Berlusconi said he discussed with French President Nicolas Sarkozy the possibility of holding a meeting of Group of Seven finance ministers within days.

A day after saying Italians shouldn’t be scared by the slump in the nation’s stocks and bonds, Berlusconi announced the new measures. To help with the plan to balance the budget in 2013, a year earlier than planned, the government will speed the elimination of tax loopholes and deductions worth 25 billion euros ($36 billion), originally set for 2013-2014.

“The budget balancing rule is merely a device to impose on Italy pretty large and painful primary surpluses for many years to come,” said Vladimir Pillonca, an economist at Societe Generale SA in London. “The temptation to dilute this mechanism could increase in bad times, which is why it is important that it’s embedded in the constitution for this rule to yield a concrete credibility and fiscal benefit.”

 

Spanish Borrowing
Spanish borrowing costs are below those of Italy for the first time since May 2010 on speculation Italy’s higher debt load makes it less able to withstand contagion from the region’s fiscal crisis. While Italy’s budget deficit of 4.6 percent of gross domestic product last year was about half that of Spain’s, the country’s debt at almost 120 percent of GDP, was twice Spain’s level and second in the EU only to Greece.

Total borrowing has remained above 100 percent of GDP since 1990 and investors have pushed up the nation’s bond yields up on concern that anemic growth will make it difficult to bring down the debt level. The Italian economy lagged behind the euro- region average every year for more than a decade. The economy expanded 0.3 percent in the second quarter, the national statistics office said today, up from 0.1 percent in the first three months when the euro region grew 0.8 percent.

Bond Slump
The slump in bonds has already translated into higher borrowing costs and the Treasury on priced 10-year bonds to yield 5.77 percent at the last auction on July 28, the highest in more than 11 years. Italy still needs to sell about 80 billion euros of bonds this year, UniCredit SpA estimates, and

World stock markets have lost more than $4.4 trillion since July 26 as speculation mounts that the global economy faces a new recession that would deepen Europe’s debt woes. The Euro Stock 600 Index fell 9.9 percent this week, its worst week since November 2008. Italian banks, the biggest holder of the govfernment’s debts were among the biggest decliner. UniCredit SpA, the biggest bank, shed 17 percent since July 26 and Banca Intesa SpA lost almost 22 percent.

Berlusconi said he’ll speak to U.S. President Barack Obama later today, according to Ansa. Tremonti spoke earlier in the day with U.S. Treasury Secretary Timothy Geithner.



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