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Italy Turns Its Focus to Stimulating Economy

December 29, 2011 by Leave a Comment

The benchmark 10-year bond was priced at an auction Thursday to yield 6.98 percent, down from a euro-era record of 7.56 at the previous sale in late November. The Italian Treasury also sold bonds maturing in 2014, priced to yield 5.62 percent, down from 7.89 percent.

The total of €7 billion, or $9.1 billion, sold Thursday in thin holiday markets was less than the goal of €8.5 billion.

At an auction of €9 billion in short-term Treasury bills Wednesday, rates fell by half from previous levels. But the sale Thursday was seen as a more significant signal of market sentiment about the longer-term outlook for Italy’s struggling economy.

The continuing high yields on 10-year bonds, just shy of the 7 percent level that many economists consider unsustainable, indicated the continuing challenges ahead. Mr. Monti acknowledged the point at a news conference after the bond sale. “We absolutely don’t consider the market turbulence to be over,” he said. “There is much more to do.”

In the near term, Mr. Monti said, his government plans to stimulate growth in the Italian economy through a package of measures that he suggested could be called “Grow Italy” — a contrast to the €30 billion austerity package, known as Save Italy, that was passed by Parliament this month.

The growth package will include moves to further open up Italy’s closed professions and guilds, encourage competition and develop an outdated economic infrastructure, which many analysts say keep production costs high and uncompetitive in world markets.

The government will also tackle labor policy, a thorny issue for unions as well as for some political parties that support Mr. Monti’s government. The prime minister said the changes would be matched by an increase in welfare services for the unemployed and for Italian youth.

The austerity package, the fourth since August, is designed to eliminate Italy’s budget deficit by 2013. It is likely to be the last for some time, as Mr. Monti said Thursday that he did not foresee the need to ask Parliament to authorize new spending in the near future.

He also said his government was “not excluding anything” in looking for ways to lower a public debt of 119 percent of gross domestic product, the second-highest ratio in the euro zone, after that of Greece.

“I know people are worried” about paying higher taxes, he said.

The austerity package and the growth measures are a two-pronged approach to steering Italy out of a debt crisis that has placed the global economy at risk, a strategy that early indicators suggest has only been partly successful.

Italy had its biggest decline in Christmas retail sales in 10 years, according to data released this week by the consumer group Codacons.

Critics of the government’s economic program have complained that it is too tax-heavy and not incisive enough when it comes to cuts to public spending.

They also criticize the lack of measures to stimulate growth, though some analysts say Mr. Monti is bound by restrictions, imposed primarily by Germany and other euro zone partners, that hamper any real growth.

If Italy is required to pursue policies that bind it to lowering its debt and balancing the budget by 2013, then “welcome to a future of stagnation and recession,” Gustavo Piga, a professor of economics at the University of Rome Tor Vergata, said Thursday.

“Do you think that if you liberalize Roman taxi drivers you’ll generate growth tomorrow?” Mr. Piga asked. “It’s important to start reforms, but you also need to stimulate demand.”

“The deal that needs to be struck is to ensure that Italy does not go through a recession like Greece,” he said. “The problem is larger than us.”

Mr. Monti said Thursday that, as an economist, he was aware that the austerity package pledged by the previous government of Silvio Berlusconi had “many drawbacks.” But not passing the measures would have had a more serious and even more recessionary outcome, he said.

He added that a long-term solution required that “work must be done in Europe” within a more integrated framework. Some of the measures, he said, could be drafted in time to present them to a meeting of euro zone finance ministers in Brussels on Jan. 23.

“Italy is making a great effort. It is looking to build a better future on less ephemeral foundations, to safeguard future generations,” Mr. Monti said.

Mr. Monti also said that the euro zone bailout fund, the European Financial Stability Facility, needed “significantly greater” resources, even if those resources were never to be effectively used.

Harvey Morris reported from London.

Article source: http://www.nytimes.com/2011/12/30/business/global/italys-long-term-borrowing-costs-decline.html?partner=rss&emc=rss

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Italy’s Debt Cost Dips, but Its Economic Perils Remain

December 28, 2011 by Leave a Comment

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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Berlusconi Resigns After Italy’s Parliament Approves Austerity Measures

November 13, 2011 by Leave a Comment

His exit, a sudden fall after months of political stalemate, paves the way for a new government of technocrats led by Mario Monti, a former member of the European Commission. Mr. Monti is likely to be installed in the next few days, following the apparent consent of key blocs of Mr. Berlusconi’s center-right coalition.

His resignation came just days after the fall of Prime Minister George A. Papandreou in Greece. Both men were swept away amid a larger crisis that has threatened the entire European Union, in which roiling financial markets have upended traditional democratic processes.

Though it was met by cheering crowds in Rome, the end of Mr. Berlusconi’s 17-year chapter in Italian politics, characterized by his defiance and fortitude, sets off a jarring political transition. “This is the most dramatic moment of our recent history,” Ferruccio de Bortoli, the editor of the Milan daily newspaper Corriere della Sera, said Saturday.

After borrowing rates on Italian bonds soared last week to levels that have required other euro zone countries to seek bailouts, Mr. Berlusconi pledged to step down after the Italian Parliament approved austerity measures sought by the European Union.

The lower house gave their final approval to some of the measures on Saturday afternoon, and two hours later, he officially submitted his resignation to President Giorgio Napolitano.

An impromptu orchestra and choir gathered outside the presidential palace, where Mr. Berlusconi resigned, playing the “Hallelujah” chorus from Handel’s “Messiah.”

Hundreds of spectators gathered outside, shouting “buffoon” and “go home” to a polarizing leader once loved by many, making Mr. Berlusconi the very embodiment of the Italian saying that the tenor is applauded until he is booed off stage. Some in the crowd were popping bottles of champagne. And cars and mopeds in downtown Rome waved Italian flags and honked their horns in celebration, as they do when the national soccer team wins.

Fulvia Roscini, 47, a nurse, had brought her 8-year-old son and 13-year-old daughter outside the prime minister’s office on Saturday evening. “We came here because I wanted my kids to see this,” she said, “to see that another country is possible and is already here.”

As he left his residence on Saturday before resigning, Mr. Berlusconi waved to crowds of supporters, but he left the presidential palace through a secondary exit, to avoid the crowds.

Mr. Berlusconi did not speak publicly after resigning. But the ANSA news agency quoted him telling aides that the jeering “is something that deeply saddens me.”

In a statement, Mr. Napolitano, who as head of state will oversee the transition, said he would hold consultations with party leaders to nominate a new prime minister on Sunday.

In this case, the discussions will likely be a formality. For days, Mr. Monti, 68, a well-respected economist with close ties to European Union officials, has been identified as the front-runner.

Mr. Monti met on Saturday with Mr. Berlusconi and earlier in the day with Mario Draghi, the recently installed president of the European Central Bank, reinforcing the notion that financial and European institutions supported Mr. Monti’s appointment.

The mandate of the next government will be to push through measures to help reduce Italy’s $2.6 trillion public debt and increase growth to keep the country competitive.

The austerity measures approved by lawmakers include selling state assets and increasing the retirement age to 67 from 65 by 2026. They would also decrease the power of professional guilds, privatize municipal services and offer tax breaks to companies that hire young workers.

Key political parties, with the exception of the Northern League, an important member of Mr. Berlusconi’s center-right coalition, have said they will support Mr. Monti.

But the wrangling over crucial details is not over. Italy’s political parties are fighting to maintain their positions in future political constellations and to ensure their re-electability after passing unpopular measures demanded by tough economic times.

Some members of Mr. Berlusconi’s coalition want early elections to form a new government with a new mandate. But the main opposition party and other lawmakers, fearing that elections would lead to an unsustainable period of market turmoil, support a transitional government.

The prospect of early elections diminished on Saturday, however, when Mr. Berlusconi’s party said in a statement that it would support a Monti government. But they added that they awaited the “names of the cabinet members, the program of the new government and the timing of the mandate.”

The events in Greece and Italy this month raised concerns across the Italian political spectrum about the growing power of financial markets to shake governments. In Italy and elsewhere, a dysfunctional political class has been “impotent” in the face of market dynamics and their impact on people’s lives, the commentator Luigi La Spina wrote Saturday in the Turin daily newspaper La Stampa.

The atmosphere in downtown Rome on Saturday evening was one of celebration mixed with uncertainty.

“I know that the crisis won’t be over just because he leaves, and I’m a bit concerned about what will happen with the markets, but I know that this country will be better without him,” said Isabella La Monica, a retiree, who was waiting in front of the prime minister’s residence. “Things can’t get any worse.”

Gaia Pianigiani contributed reporting.

Article source: http://www.nytimes.com/2011/11/13/world/europe/silvio-berlusconi-resign-italy-austerity-measures.html?partner=rss&emc=rss

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