Bloomberg News

Draghi Says New Phase Has Opened in European Debt Crisis

July 13, 2011

(Updates with Draghi quotes in third paragraph, bonds in fourth paragraph. For more on the debt crisis {EXT4 <GO>)}

July 13 (Bloomberg) -- Europe’s debt crisis has entered a new phase and policy makers must come up with a “clear” response to stop the contagion that threatens the region’s single currency, said the European Central Bank’s incoming President Mario Draghi.

“It’s now necessary for those trying to manage the sovereign crisis to give certainty, to define with clarity the political objectives, the scope of the instruments and the amount of resources available,” Draghi said today in a speech in Rome. “It’s a necessary step to ensure the stability of the euro area and its currency.”

European governments can no longer count on their financing costs remaining similar to those of Germany, the region’s strongest economy, simply because of their participation in the single currency, he said.

“The solvency of the sovereign states is no longer something acquired he said, but something earned with high and sustainable growth, which is only possible if budgets are in order,” Draghi, who also heads the Bank of Italy said. “Today’s cost of credit reflects that new reality.”

Draghi’s comments at the annual meeting of Italy’s banking association came after Italian bonds and stocks plunged in recent days on concern the country would struggle to reduce the euro-region’s second-biggest debt. The yield on Italy’s 10-year bond reached the highest since 1997 and financing costs at a sale of treasury bills surged on investor concern that Italy would be the next victim of the region’s debt crisis.

Bonds Gain

Italian bonds gained today on pledges by the government for swift passage of a 40 billion-euro ($64 billion) deficit- reduction plan that seeks to balance the budget in 2014. The premium investors demand to hold Italy’s 10-year bond over German bunds fell 17 basis points to 269.3, down from a euro-era record of 348 reached during trading yesterday.

Italian Finance Minister Giulio Tremonti, speaking at the same conference, said the plan would be passed by both houses of parliament by July 15. Opposition parties have agreed to ease passage of the measure in the legislature.

“Italian politicians decided to respond firmly to market concerns over the credibility and implementation of the 40 billion-euro fiscal package,” Fabio Fois, European economist at Barclays Capital in London said in a note to investors. “These are clearly positive developments. The fiscal plan was originally supposed to be voted on at the beginning of August.”

Asset Sales

The deficit plan is “an important step in strengthening the public accounts” that will help reduce the debt, Draghi said. He also called on the government to explain details of additional measures for 2014 that will be needed to achieve the balanced budget.

Tremonti did say the government was considering a plan to sell off more state-owned assets “once the crisis passes.”

Austerity measures won’t be enough for Italy and other euro-region countries to reduce debt if not accompanied by policies to boost economic growth, Draghi said. The Bank of Italy expects Italian growth to continue to lag behind the euro area average for the next two years, he said. Second-quarter growth did expand at a similar pace as that of the euro region, Draghi said, reversing the trend in the first three month when Italy grew 0.1 percent, a fraction of the 0.8 percent rate for the euro area.

In contrast to many European economies, Italy has the advantage of a solid banking system and a declining jobless rate, Draghi said.

Italian lenders will pass stress tests this week with a “significant” margin of capital above the core Tier 1 minimum, he said. He estimated the lenders still need to boost capital by 20 billion euros to meet Basel 3 standards for 2019, he said.

--Editor: Andrew Davis, Craig Stirling

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net. Jeffrey Donovan at jdonovan26@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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