Bloomberg News

Tremonti Rushes to Rome for Austerity Talks as Bonds Plunge

September 05, 2011

(Updates with markets in fifth paragraph, opposition statement in 16th, strike details in 18th.)

Sept. 5 (Bloomberg) -- Finance Minister Giulio Tremonti canceled a public appearance in northern Italy to rush to Rome for budget talks as bonds plunged amid concern the government may backslide on its latest austerity package.

“The minister received a request to head to Rome immediately to go to the Senate, just as he was coming to Piacenza,” Stefano Rodota, moderator of the conference where Tremonti had been scheduled to speak, announced at the event, which was broadcast live on the Internet.

The Senate will begin a debate tomorrow on Prime Minister Silvio Berlusconi’s 45.5 billion-euro ($64 billion) austerity package just as CGIL, the nation’s biggest union, holds a strike across Italy against the measures. Investor concern has been rising since the government agreed last week to drop spending cuts and tax increases from the plan, which was announced on Aug. 5 to convince the European Central Bank to buy Italian bonds in a bid to stem surging borrowing costs.

“The austerity plan runs the risk of becoming a farce and this weighs on those banks holding lots of government bonds,” Gianmaria Bergantino, a fund manager at Bank Insinger de Beaufort in Rome, said by phone. “As the government doesn’t seem to be responding to the ECB’s requests, investors are starting to price in a further budget adjustment within a month.”

The price of the nation’s 10-year bond fell for an 11th day, pushing the yield to 5.57 percent, the highest in more than four weeks. Milan’s stock benchmark FTSE MIB Index closed down 4.8 percent, with UniCredit SpA and Intesa Sanpaolo SpA, Italy’s biggest banks, dropping 7.3 and 7 percent, respectively.

ECB Warnings

Officials at the Frankfurt-based ECB have called on Italy to stick to its budget targets. The austerity package must be “fully confirmed and implemented,” ECB President Jean-Claude Trichet said in Cernobbio, Italy, on Sept. 3. “This is absolutely decisive to consolidate and reinforce the quality and credibility of the Italian strategy and creditworthiness.”

Bank of Italy Governor Mario Draghi, who will become ECB president on Nov. 1, said the central bank’s bond buying is “temporary” and should not be taken for granted by euro-region member states. The purchases “cannot be used to circumvent the fundamental principle of budgetary discipline,” Draghi said, according to the e-mailed text of a speech in Paris today.

Berlusconi and Tremonti agreed to overhaul the plan after an Aug. 29 meeting with officials from the co-ruling Northern League party, which opposed parts of the original package that aimed to balance the budget in 2013.

Tax Evasion

A tax on the highest earners was dropped while cuts to regional governments were eased. Tremonti said on Sept. 1 that some lost revenue will be compensated for by a crackdown on tax evasion and the plan will still meet deficit-reduction goals.

The changes in the package create a shortfall of at least 7 billion euros, Vladimir Pillonca, an economist at Societe Generale SA in London, estimates. “The fiscal rigor promised by Rome to the ECB in August seems to be undergoing a severe loss of momentum,” he said.

Downgrades of Italy’s credit rating now “look probable,” Societe Generale economists said in a report today, citing the poor economic and budgetary outlook and “uncertainties over the availability of market financing.” Standard & Poor’s and Moody’s Investors Service put the country’s credit rating on review in May and June, respectively, citing poor economic- growth outlook.

“For a long time, the spreads between sovereign securities remained narrow and unresponsive to the different policy choices and economic performances,” Draghi said today. “Interest rates reflect today’s new situation: they are higher for countries with low growth and weaker public finances.”

Yields Surge

The extra premium investors demand to hold Italian 10-year bonds over benchmark German bunds advanced 44 basis points to 371 basis points, the highest since before the ECB starting buying Italian bonds Aug. 8. The cost of insuring the nation’s sovereign debt against default surged, with credit-default swaps on Italy jumping 24.5 basis points to a record 427.

Shares in Intesa, Italy’s second-largest bank, fell to the lowest since 1997. UniCredit, the country’s biggest lender, dropped to lowest since March 2009. Banca Monte dei Paschi di Siena SpA, the nation’s third-biggest bank, declined to the lowest in more than 11 years.

‘Bad Mistake’

“Recent changes to the original Italian austerity plan were a bad mistake -- perhaps not so much economically, but they confirmed the lack of credibility of the current government and therefore caused extreme political collateral damage on a European level,” Marius Gero Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich, said by e-mail.

The Senate may hold a final vote on the bill by Sept. 7, Anna Finocchiaro, head of the opposition Democratic Party in the upper house, said in an e-mailed statement. Passage there would pave the way for the Chamber of Deputies, where Berlusconi has a narrower majority, to give final approval.

The Senate debate may coincide with the general strike, which will shut many government offices and disrupt travel and manufacturing. Alitalia SpA will cancel some flights due to the strike scheduled for between 10 a.m. and 6 p.m., the airline said in an e-mailed statement today. Intercontinental flights are not expected to be affected by the work stoppage, it added.

The austerity plan is “unfair” and will have “depressive effects,” GCIL leader Susanna Camusso said in Milan on Sept. 2.

--With assistance from Sonia Sirletti in Milan and Zoe Schneeweiss in Vienna. Editors: Jeffrey Donovan, Fergal O’Brien

To contact the reporters on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net; Lorenzo Totaro in Rome at ltotaro@bloomberg.net.

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net


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