Bloomberg News

Berlusconi Survives First Confidence Vote on Austerity Plan

July 14, 2011

(Updates with Tremonti quote in third paragraph, bond sale in sixth, analyst in eighth paragraph.)

July 14 (Bloomberg) -- Prime Minister Silvio Berlusconi survived a confidence vote on a 40 billion-euro ($56 billion) austerity package that aims to protect Italy from the region’s debt crisis.

Berlusconi staked the survival of his government on the outcome and carried the vote in the Senate in Rome, 161 to 135. The lower house Chamber of Deputies, where Berlusconi has a narrower majority than in the Senate, holds a confidence vote tomorrow to secure final passage of the measures.

“We are required to seek a path in 2011 aimed at achieving a balanced budget in 2014,” Finance Minister Giulio Tremonti told the Senate before the vote. “The European Commission, the OECD and Germany have expressed positive views of our budget plan,” the bulk of which will be implemented in 2013 and 2014.

Berlusconi pushed for quick passage of the legislation after investors began dumping Italian securities on concern that Italy, with the region’s second-highest debt, would become the next victim of Europe’s sovereign crisis. The selloff pushed the yield on Italy’s 10-bond to a 14-year high and sent its benchmark stock index to the lowest in more than two years.

New Phase

Europe’s sovereign-debt crisis has entered a new phase as contagion now threatens to spread to Italy and Spain, European Central Bank incoming President Mario Draghi said yesterday in Rome. Italy’s austerity package is “an important step in strengthening the public accounts,” he said.

The surge in Italy’s bond yields is already boosting the cost of financing its deficit. Italy priced 1.25 billion euros of five-year bonds at an auction today to yield 4.93 percent, the highest in three years and up from 3.9 percent at the previous sale on June 14.

“This is not a result that sweeps away contagion fears, ratings fears,” Luca Jellinek, head of European interest-rate strategy at Credit Agricole CIB, said in an e-mailed comment. “Concessions are costly, though not crippling at this point.”

The premium investors demand to hold Italian 10-year bonds over German bunds widened six basis points to 286, down from a euro-era of 348 basis points hit during trading two days ago. The benchmark FTSE MIB stock index lost 0.7 percent today and has fallen more than 7 percent in July.

Credit Ratings

Warnings from Moody’s Investors Service and Standard & Poor’s that they were reviewing Italy’s rating for a possible downgrade, coupled with opposition within the government to the budget plan designed by Tremonti, helped drive yields higher.

Berlusconi is resorting to confidence votes to pass the package to end debate and force his allies to back the measure or risk the collapse of the government. His popularity has fallen to a record low amid corruption allegations and sex scandals that prompted dozens of his allies to abandon his government last year.

Until now, Italy had avoided the worst of the fallout from the debt crisis that forced Greece, Ireland and Portugal to seek bailouts. Italy hasn’t had its rating cut since Greece set off the crisis in October 2009 and the country’s deficit of 4.6 percent of gross domestic product last year is less than half those of Greece, Spain and Ireland. Tremonti’s success at containing the shortfall helped limit increases in the country’s debt, even though total borrowing has topped 100 percent of GDP for more than 20 years.

Debt Load

Italy has about 1.8 trillion euros of debt, more than Greece, Spain, Portugal and Ireland combined, making it difficult for the euro-area to bail out the country if its borrowing costs became prohibitive. Fitch Ratings said yesterday that Italy is set to meet this year’s budget-gap target of 3.9 percent of GDP.

The government will spend about 75 billion euros financing its debt this year, based on the average interest rate of 4 percent forecast by the government. Those projections foresee a jump to 85 billion euros by 2014 as financing costs rise by a point. Jefferies International Ltd. estimates that a rate of 6 percent would cost the government an additional 35 billion euros. P[ap

--Editors: Dan Liefgreen, Andrew Davis

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

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


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