Italy’s Senate rushed to pass debt-reduction measures that clear the way for establishing a new government that may be led by former European Union Competition Commissioner Mario Monti in a bid to restore confidence in Europe’s second-biggest debtor.
The Senate is set to vote tomorrow on a package of measures including asset sales and an increase in the retirement age. The Chamber of Deputies may vote the following day, and Prime Minister Silvio Berlusconi will resign “immediately,” Angelino Alfano, the secretary of Berlusconi’s People of Liberty party, said on state-owned Rai television last night.
Italian President Giorgio Napolitano named Monti yesterday as a Senator for Life, an honorary position that allows him to vote in the upper house of parliament. Alfano, when asked about whether Monti would lead the government, said that Berlusconi had backed his appointment as a Senator for life and first named Monti as EU commissioner in 1994. Monti may be nominated as soon as Nov. 13, newspaper Il Sole 24 Ore reported.
“A technocrat government, most likely headed by Mario Monti is in our view the best and at this stage probably the only possible credible outcome,” Nomura International economist Lavinia Santovetti wrote in a note to investors yesterday.
Italy’s bond yields remained about the 7 percent threshold that prompted Greece, Portugal and Ireland to seek bailouts after Berlusconi’s parliamentary majority unraveled and LCH Clearnet SA said it would demand additional collateral on Italian debt. German Finance Minister Wolfgang Schaeuble told lawmakers yesterday Italy may need to consider a request for European Union aid, two people present at the meeting said.
“A prolonged period of 10-year bond yields in excess of 7 percent alongside a faltering economy is a dangerous mix, and could send Italy’s debt dynamics lurching toward an unsustainable and ultimately insolvent position,” Raj Badiani, senior economist at HIS Global Insight wrote in a note to investors. “However, we continue to argue that Italy remains solvent, and that it can survive several quarters of expensive debt auctions.”
The yield on Italy’s 10-year bond jumped 12 basis points to 7.37 percent, the highest since the introduction of the euro in 1999. The yield on the five-year bond rose 21 basis points to 7.8 percent. The premium investors demand to hold Italian’s 10- year debt over similar maturity German bunds reached 566 basis points, another euro-era record. Mediaset SpA, Berlusconi’s media company, gained 1.6 percent to 2.24 euros after yesterday’s 12 percent plunge, its worst decline in more than two months.
The budget measures presented last night were first pledged to European Union allies at a summit on Oct. 26 and are aimed at convincing investors Italy can overhaul its economy to reduce borrowing. Months of squabbling within Berlusconi’s Cabinet over the plans ended up fueling the collapse of the government and the selloff of the country’s debt. Berlusconi, after failing to muster a majority in a routine vote yesterday, told President Giorgio Napolitano he would resign as soon as the measures were passed.
Once Berlusconi resigns, Napolitano will begin consultation with political parties to see if they can agree to form a new government. Napolitano did a round of consultations with political parties earlier this month as the crisis deepened, an exercise which may help speed an agreement.
“This is in anticipation of giving him the task of forming a new government, probably on Monday morning -- this should stabilize the market,” Marino Valensise, chief investment officer in Hong Kong at Baring Asset Management Ltd., which manages about $53 billion, said in a Bloomberg Television interview. “The problem is access to financial markets -- rolling over debt,” rather than solvency, he said.
Italy will test investor demand today when it sells 5 billion euros of one-year bills today and then as much as 3 billion euros of five-year bonds on Nov. 14. The country is set to spend 77 billion euros this year in financing its debt and faces about 200 billion euros of bonds maturing in 2012.
U.S. President Barack Obama drew a distinction between Italy’s situation and that of Greece, the Italian news agency Ansa reported, citing an interview at the White House. “Italy isn’t Greece, it’s a large country and a rich country,” Obama said, according to Ansa. “Athens’ problem is really one of solvency,” while Italy’s difficulty “is more one of liquidity,” Obama said, Ansa reported.
The political turmoil in Italy coupled with Greece’s inability to name a new prime minister, contributed to declines in the euro and a slump in stocks. The single currency slid to a one-month low of $1.3484.
The measures presented to the Senate last night include a pledge to raise 15 billion euros ($20 billion) from real estate sales over the next three years, a two-year increase in the retirement age to 67 by 2026, opening up closed professions within 12 months and the gradual reduction in government ownership of local services.
The EU and the European Central Bank had pressured Italy to adopt the measures to try to spur growth and cut a debt of 1.9 trillion euros, more than Greece, Spain, Ireland and Portugal combined.
Italy failed to deliver some measures pledged to the EU, such as making it easier for companies to fire workers during economic downturns. The bill did include tax incentives to hire apprentice workers, though won’t seek to modify Article 18 of the labor code, which restricts firing practices.
Italy’s bond yields began to climb in July as Europe’s failure to contain Greece’s debt woes fueled contagion. The country’s deficit of 4.6 percent of gross domestic product last year is similar to that of Germany’s at 4.3 percent and less than that of the U.K. and France.
The country has a surplus in its primary budget, which excludes debt interest payments, and its debt is barely rising. Still, at almost 120 percent of GDP, second only to Greece, the debt load began to spook investors in a country where economic growth has trailed the EU average for more than a decade.
The government in August announced a 45 billion-euro package of austerity measures to balance the budget in 2013. The plan helped convince the ECB to backstop Italian debt. The ECB has spent more than 100 billion euros since beginning its purchases of Italian and Spanish bonds on Aug. 8, an effort that has failed to stem the rise in yields.
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