Bloomberg News

Berlusconi Survives Confidence Vote as Italian Bonds Slump

October 14, 2011

(Updates with strategist’s quote in fourth paragraph, spread in fifth. For more on the debt crisis, EXT4 <GO>.}

Oct. 14 (Bloomberg) -- Prime Minister Silvio Berlusconi won a parliamentary confidence vote today to avert the collapse of his government, giving him more time to try and steer Italy out of Europe’s debt crisis.

Berlusconi carried the vote in the Chamber of Deputies in Rome 316 to 301. The motion was called after the premier failed to muster a majority in a routine ballot this week, prompting President Giorgio Napolitano to call on the premier to clarify “questions and concerns” about his ability to govern the euro area’s third-biggest economy.

Pressure is mounting on Berlusconi, 75, as investors dump Italian debt even after the European Central Bank began buying it on Aug. 8 to stem surging borrowing costs. The yield on the nation’s benchmark 10-year bond rose for a sixth day to as high as 5.86 percent, the most since Aug. 5, when Berlusconi unveiled a 54 billion-euro ($73 billion) austerity package that convinced the ECB to backstop Italy’s debt.

“Winning the battle does not mean that the war has been won,” Marc Ostwald, a fixed-income strategist at Monument Securities Ltd., said in an e-mail. “The longer that Berlusconi hangs on by his fingernails, the less likely that a temporary technocratic government can be put in place to implement the more unpopular measures in terms of structural reforms before holding a general election.”

Deepening Divisions

The extra yield investors demand to hold Italy’s 10-year bond instead of equivalent German debt narrowed four basis points after the vote to 361 basis points. That compares with a euro-era record of 416 basis points on Aug. 5. The ECB bought Italian government bonds today, according to two people with direct knowledge of the transactions.

The austerity package further deepened fissures in Berlusconi’s coalition as ministers pushed back against the spending cuts put forward by Finance Minister Giulio Tremonti. Umberto Bossi, leader of the Northern League that’s part of the ruling coalition, said Oct. 6 it was “objectively difficult” for the government to last until the end of its term in 2013.

Berlusconi has sought to make peace in recent weeks among warring factions in his coalition, while also trying to defend himself in four different criminal trials, including one for paying a minor with sex. He denies any wrongdoing.

Botched Vote

Berlusconi called for the confidence motion after key allies failed to turn up on Oct. 11 for a routine vote on the 2010 budget report. Tremonti and Bossi were both absent from the ballot, raising doubts about their commitment to the government.

Concerns about the government’s ability to boost growth enough to bring down a debt of 1.9 trillion euros led all three main rating companies to downgrade Italy over the past month. Until July, Italy had avoided the worst of the debt crisis with a budget deficit last year of 4.6 percent of output, less than France’s 7 percent.

“We’ve kept public finances in order and we’re the best in Europe in terms of primary surplus,” Berlusconi told reporters today at Parliament. “We also have a deficit by far lower than other important European countries such as France and England. As far as the policies for growth are concerned, we have to make sure they don’t negatively affect our finances.”

Growth Plan

Berlusconi said that next week he will present a long- delayed plan to boost growth that would be revenue-neutral. He acknowledged yesterday that austerity measures may slow growth, which has lagged behind the euro-region average for the last decade, making it harder to cut debt of about 120 percent of output, the second largest in Europe after Greece.

Bank of Italy Governor Mario Draghi this week urged the government to quickly passes measures to boost the economy, saying austerity cuts alone wouldn’t spare the nation from an “ungovernable” debt spiral.

“If protracted, the high borrowing costs seen in the last three months could largely offset” the effects of the austerity measures, “with a further negative impact on the cost of debt, in a spiral that may end up being ungovernable,” Draghi said in a speech in Rome on Oct. 12.

Berlusconi said he will discuss Draghi’s successor with Napolitano later today. Draghi takes over as ECB president on Nov. 1 and Berlusconi has publicly clashed with Tremonti over his possible successor and other issues, such as tax cuts.

“The next crisis is just round the corner and the chances that this government will run its full term to 2013 are decreasing by the minute,” James Walston, a professor of politics at the American University in Rome, said. “Spring elections are more and more likely and the overall prospects are not good.”

--Editors: Jeffrey Donovan, Andrew Davis

To contact the reporters on this story: Chiara Vasarri in Rome at asarri@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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