Bloomberg News

Berlusconi Bows to Demands to Overhaul Italy Austerity Plan

August 30, 2011

(Updates with Berlusconi comment in second paragraph, Visco in sixth.)

Aug. 30 (Bloomberg) -- Prime Minister Silvio Berlusconi agreed to overhaul the 45 billion-euro ($66 billion) austerity plan that persuaded the European Central Bank to support Italy’s bonds, dropping a tax on the highest earners and limiting funding cuts to regional governments.

“I’m very, very satisfied because the plan has been improved without changing the total value,” Berlusconi said in an interview with the “Studio Aperto” program on Mediaset SpA’s Italia 1 television. “Now the austerity package is more equal and sustainable.”

Berlusconi and Finance Minister Giulio Tremonti agreed to the changes after a seven-hour meeting yesterday with officials of the Northern League, a key coalition ally opposed to parts of the original plan that aimed to balance the budget in 2013.

That package was the second austerity plan in a month adopted by the government as Italy tries to convince investors it can tame the euro region’s second-largest debt and avoid following Greece, Ireland and Portugal in seeking a bailout. The plan was put together in days and passed by the Cabinet on Aug. 12 after the ECB demanded additional austerity measures to buy Italian bonds, Tremonti has said.

‘Close Eye’

“The ECB will raise its voice if there aren’t further guarantees that it’s completely covered,” said Marco Valli, UniCredit’s chief euro-area economist. “It seems now that there will be some kind of revenue shortfall, but we still don’t have all the details and it’s probable that for now, the ECB will be keeping a close eye on this”. A spokesman for the Frankfurt- based ECB declined to comment.

Austerity measures and slowing global demand will depress the country’s growth, endangering the government’s debt reduction targets, Bank of Italy Deputy Director General Ignazio Visco said in testimony to the Senate in Rome today, adding that the government’s measures should rely less on tax increases and more on easing labor laws and business regulations.

Italy’s economy remains 5 percent smaller than before the financial crisis, Visco said, suggesting that the government will have to lower its forecast that the economy will grow 1.1 percent this year, with growth rising to 1.6 percent in 2014.

Bonds Decline

Italian bonds fell for a seventh day, the longest streak of declines since February, as demand declined at the first auction of 10-year securities since the European Central Bank began buying the nation’s debt. The yield on Italy’s benchmark 10-year bond has fallen about 100 basis points since the ECB began buying. The yield rose 2 basis points today to 5.11 percent, the highest in three weeks.

The ECB has restrained Italy’s borrowing costs in the past three weeks by buying its bonds in the secondary market after contagion from the sovereign-debt crisis sent yields to a euro- era record 6.40 percent on Aug. 5.

“The deterioration in Italy’s perceived creditworthiness in July was triggered by external events, now domestic issues are becoming the focal point for investor anxiety” said Nicholas Spiro, who runs Spiro Sovereign Strategy, a London- based consulting firm specializing in sovereign credit risk.

The new version of the package, which is due to be voted on by the Senate next week, drops the “solidarity tax,” which would have imposed an additional 5 percent on income of more than 90,000 euros a year, rising to 10 percent for income above 150,000 euros, Berlusconi’s office said in an e-mailed statement.

No VAT Increase

The new plan does not include an increase in value-added tax to compensate for lost revenue, which some lawmakers had called for. The solidarity tax will be replaced with unspecified levies aimed at the wealth of those evading taxes, the note said.

“We estimate that the possible fiscal slippage would be lower than 3.3 billion euros over three years” assuming the new measures to combat tax evasion do not work at all, Fabio Fois, an economist at Barclays Capital in London, said in a note to clients. “As we had already projected that Italy would have hardly met its fiscal target for 2013, the estimated possible fiscal slippage is not going to alter our view much.”

Cuts in funding to regional and local governments, totaling 9 billion euros in the original two-year plan, will be scaled back. Those reductions will be trimmed by about 2 billion euros, Roberto Calderoli, minister for legislative simplification, told the Ansa news agency.

‘Weakening Globally’

“About the credibility of the measures, there is implementation risk,” said Silvio Peruzzo, euro-area economist at Royal Bank of Scotland Group Plc in London. “The growth outlook is weakening globally. Some of the measures have to be qualified in terms of the details. This is a feature of any fiscal effort you see anywhere in the globe.”

The International Monetary Fund will cut its forecast for Italian economic growth next year to 0.7 percent, Ansa reported, citing a draft of the fund’s World Economic Outlook report. Tremonti forecasts growth of 1.3 percent for 2012.

The statement didn’t say whether plans to raise the capital-gains tax to 20 percent from 12.5 percent had been modified, or whether a so-called Robin Hood tax on profit of electricity utilities had been altered.

The new package will go ahead with efforts to reduce the size of the parliament, the statement said. Legislators will still have to pay a solidarity tax of 10 percent on income over 90,000 euros.

--With assistance from Alessandra Migliaccio in Rome, Mark Deen in Paris and Jana Randow in Frankfurt. Editor: Andrew Davis, Eddie Buckle

To contact the reporter on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net.


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