(Updates with debate started in third paragraph, markets in sixth.)
Sept. 14 (Bloomberg) -- Prime Minister Silvio Berlusconi’s 54 billion-euro ($74 billion) austerity plan may receive final approval in Parliament today as Italy seeks to avert contagion from Europe’s debt crisis.
The lower house Chamber of Deputies will hold a confidence vote on the package in Rome, a day after borrowing costs surged at an Italian debt auction. The Treasury sold 3.9 billion euros of five-year bonds to yield 5.6 percent, up from 4.93 percent at the last sale on July 14.
Lawmakers have begun discussing the bill, which seeks a balanced budget by 2013 and was passed by the Senate on Sept. 7. The vote is due in the early afternoon and comes after German Chancellor Angela Merkel warned yesterday in a radio interview that an “uncontrolled insolvency” of Greece would further roil markets spooked by the prospect of default.
“Its complete implementation will be vital,” European Union President Herman Van Rompuy said at a press appearance with Berlusconi in Brussels yesterday. To restore confidence in financial markets, the plan’s “adoption is important, not only for Italy but for all of the euro zone.”
The legislation revised measures in a plan the government approved by decree last month to convince the European Central Bank to buy the nation’s bonds. That package failed to reassure investors after Berlusconi, bowing to political pressure from allies, watered it down by scrapping moves such as a wealth tax.
The backslide prompted an 11-day fall in Italian bonds that ended on Sept. 6, when the government beefed up the plan by adding a one-percentage point increase in the value-added tax and a new levy on incomes over 300,000 euros. The 320-seat Senate, where Berlusconi’s government enjoys a wide support, then voted 165 to 141 to adopt the package. In the lower house, the government enjoys a smaller majority.
The premium investors demand to hold Italian 10-year bonds instead of benchmark German bunds narrowed eight basis points as of 12:23 p.m. in Rome to 383 basis points. Yesterday, the spread reached 391 basis points, the highest since before the European Central Bank started buying Italian bonds on Aug. 8 in exchange for the government’s approval of the original austerity package.
After the plan’s adoption, the government will review its policies on economic growth, Finance Minister Giulio Tremonti said on Sept. 10. “If there are things to change in our growth measures we will, and if there are things to add, we will,” Tremonti told reporters at a meeting of G-7 finance ministers in Marseille, France.
Standard & Poor’s in May and Moody’s Investors Service in June warned that they may downgrade Italy, saying the government may miss its revenue and deficit targets amid chronically sluggish economic growth and possible political instability. Italy’s economy will contract 0.1 percent in the three months through September, the Organization for Economic Cooperation and Development forecast last week.
Even as austerity weighs on Italy’s expansion, the country may need more deficit cuts, said Mario Baldassarri, head of the Senate Finance Committee and a former Berlusconi ally. “How long can the ECB continue to buy Italian Treasury bonds?” he said in a Sept. 7 interview. “We may need another adjustment in three, four weeks which will be the real answer to the European Commission and to markets.”
Italian officials met in the past month with delegates from China Investment Corp. to discus investments in the European country, an Italian official familiar with the matter said on Sept 12. Government-bond purchases were not the focus of the talks, he added. The Financial Times reported that debt sales had been on the agenda.
The Italian government didn’t ask for “any particular help” from China and the talks only addressed possible “industrial investments,” Deputy Economy Minister Antonio Gentile said in an e-mail yesterday.
--Editors: Jeffrey Donovan, Leon Mangasarian
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