Last week, Mr. Monti won final approval of a $40 billion spending package of tax increases and a pension change aimed at eliminating Italy’s budget deficit by 2013. But with Italians starting to feel the pain and dissent growing in Parliament, Mr. Monti must act swiftly to stimulate Italy’s economy, which is already in recession and is expected by some forecasters to shrink in 2012.
On Wednesday, the day his cabinet met to discuss growth-boosting measures, Mr. Monti appeared to receive some breathing room when interest rates on six-month treasury bills, a barometer of investor worry about Italy’s creditworthiness, dropped in half to 3.2 percent and rates on 10-year treasury bills dropped to 6.91 percent from above 7 percent, nearing the levels at which other euro-zone countries such as Ireland and Greece needed bailouts.
“Of course it’s an important and comforting signal,” said Massimo Giannini, the business editor and deputy editor of the center-left La Repubblica daily, adding that the government had been concerned that the borrowing rates had remained high even after it had passed the austerity measures.
“But the pot is still boiling,” he added, meaning that Italy’s economic travails remain acute. “The problem is that we need to re-launch economic growth but there isn’t a lot of money to do this. It’s a huge problem and they don’t know how to do it,” Mr. Giannini said of the Monti government.
Market analysts said the drop on borrowing rates on Wednesday partly reflected Italian bond purchases by the European Central Bank and other European banks, which received a large infusion of low-interest capital from the European Central Bank earlier this month.
Analysts said that a bigger test for Italy would come in a larger bond auction on Thursday. Italy, the euro zone’s third-largest economy, must refinance almost 200 billion euros in government debt by April, and if borrowing rates remain high, the country could face a solvency crisis and potential default that could threaten the stability of the euro currency.
In many ways, Italy’s borrowing rate fluctuations only compound its political complexities. Analysts doubted that the lower rates seen on Wednesday would buy Mr. Monti more time. Moreover, they said, his government needs a certain amount of market pressure in order to help push through politically unpopular structural changes in the economy that the parties nominally backing him in Parliament are not eager to carry out.
Yet if the market pressure becomes too high and the borrowing rates remain too onerous, Italy risks a default.
“A part of the political class thinks that if the market pressure lets up, we can also lessen the sting of cleaning up the economy, to do weaker economic measures,” Mr. Giannini said. “But by now I think there’s a broad awareness, at least on the part of the government, that we have to do these measures regardless of the euro and regardless of the commitment we made with Europe.”
In August, Italy agreed to reduce its budget deficit by 2013 and enact structural changes to its pension system and labor markets in exchange for purchases of Italian government debt by the European Central Bank.
The People of Liberty party, the largest party supporting Mr. Monti’s government in Parliament, believes that its former leader, Silvio Berlusconi, was swept out of office by market forces, not traditional democratic processes, and in recent weeks has attempted to gain political ground by capturing Italian discontent at the austerity measures.
“There’s no clear link between the decisions taken by the government and the markets,” Angelino Alfano, the leader of People of Liberty party and Mr. Berlusconi’s political heir, told a group of reporters last week. “No matter how illuminated the choices are of the Italian government, can they change the course of the euro crisis or the destiny of Europe?” he asked, calling on Europe to take broader action.
In recent weeks, Mr. Monti, too, has been calling on Europe — which is to say Germany, the euro zone’s biggest and strongest economy — to help provide more institutional support for the euro.
Germany has adamantly opposed what it sees as rewarding the bad behavior of southern rim countries like Italy, Greece, Spain and Portugal, which amassed high public debts and where tax evasion is rampant. But it has also been vehemently opposed to changes that many economists and the Obama administration say are necessary to assure the stability of the euro, such as allowing the European Central Bank to become a lender of last resort like the Federal Reserve in the United States.
The troubled backdrop to Italy’s economic challenge is neighboring Greece, where nearly two years of austerity measures — tax increases and wage cuts — demanded by the country’s foreign lenders have pushed the country into a deep recession and led to deep cuts in basic services like health care.
Article source: http://www.nytimes.com/2011/12/29/world/europe/despite-drop-in-borrowing-rates-italys-economic-travails-remain-acute.html?partner=rss&emc=rss
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