Bloomberg News

Berlusconi Seeks Deal on Measures as EU Calls for ‘Action’

October 25, 2011

(Updates markets in fifth paragraph, adds report of minister saying government fall is possible in ninth.)

Oct. 25 (Bloomberg) -- Prime Minister Silvio Berlusconi is seeking a last-minute agreement with allies on measures to spur economic growth as the European Union called on Italy to commit to “specific actions” to fight the sovereign-debt crisis.

Berlusconi met again today with members of his coalition to discuss a proposal to raise the retirement age after ministers failed to take any decisions at a Cabinet meeting late yesterday amid opposition by the Northern League, Berlusconi’s key ally. League leader Umberto Bossi told reporters in Rome that it’s “difficult, very difficult” to reach an agreement.

Italy must back up its commitments on reforms with “specific actions” and “clear timing,” Amadeu Altafaj, a spokesman for Olli Rehn, the EU Economic and Monetary Affairs Commissioner, told reporters today in Brussels. The nation must do all it can “to reduce the risks to which our government debt is exposed on financial markets,” Italian President Giorgio Napolitano said in an e-mailed statement.

Berlusconi pledged before yesterday’s Cabinet meeting to take “important decisions” on structural changes, as EU leaders prepare to meet for a second summit this week in Brussels tomorrow to discuss ways to contain contagion from near-defaulted Greece.

“At this stage, the political deadlock may not allow Berlusconi to force the situation with the Northern League,” Fabio Fois, an economist at Barclays Capital in London, wrote in a note to investors. “There is a non-negligible chance that the prime minister will present to the EU meeting only a road map of structural measures to which the government is committed.”

‘No Alternative’

The yield on Italy’s benchmark 10-year bonds climbed to 5.96 percent, pushing the premium with German bunds of equivalent maturity to 388 basis points as of 4:05 p.m. Rome time. That spread reached 400 basis points last week for the first time since Sept. 22, even after the European Central Bank started buying Italian and Spanish debt on Aug. 8 to stem surging borrowing costs.

“There is no alternative to raising the pension age as this is the condition required by Europe to support Italy at a time our sovereign debt is under pressure,” Lamberto Dini, a former Italian prime minister, told Sky TG24 in an interview.

Berlusconi, struggling to hold together his fractious coalition, told Napolitano yesterday that he doesn’t plan to resign before his term ends in 2013 and will press ahead with measures to convince European partners that Italy can tame the debt crisis, Corriere della Sera reported today, without citing anyone.

A collapse of the government may be a “hypothesis,” Transport and Infrastructure Minister Altero Matteoli told reporters in Rome today, according to Ansa news agency.

Slowdown

“Should Italy fail to implement changes to the pension system, there will be less confidence about our sovereign debt,” Dini said. “The spread with German bonds will go beyond the current level and we’ll head down the same road as Greece.”

Italy’s economy expanded 0.3 percent in the second quarter from the three months through March, when it grew 0.1 percent. Italy has been downgraded over the last month by the three main rating companies, starting with Standard & Poor’s on Sept. 19.

Italy, which has the euro region’s biggest debt load after Greece, faces a “slowdown almost certainly leading to a recession in 2012 and 2013,” Vladimir Pillonca, senior European economist at Societe Generale SA in London, said in a report today. Weak growth means “Italy’s economy and fiscal position will remain highly vulnerable to shocks” and the “perceived macro risk is likely to remain high.”

Berlusconi was put on the defensive over the country’s finances at an Oct. 23 EU summit in Brussels. French President Nicolas Sarkozy told reporters he had confidence in “Italian authorities as a whole,” while declining to answer a follow-up question on whether he had confidence in the Italian premier.

‘Give Lectures’

Berlusconi appeared to take issue with the comments, saying “nobody can give lectures” to other EU members. “Nobody in the EU can self-nominate himself commissioner and speak in the name of elected governments,” he said in yesterday’s statement.

Napolitano today criticized the “unpleasant expressions” about Italy by European leaders at the summit. “Untimely and unpleasant public expressions of lack of confidence on the sidelines of institutional meetings among heads of state, cannot make use lose sight of the substantial issues and challenges we have before us,” he said.

The ECB began buying Italian and Spanish debt after borrowing costs soared to euro-era highs amid investor concern that the nations may succumb to the sovereign crisis. Spanish and Italian bonds fell after Europe’s leaders struggled at the weekend summit to convince investors they can craft an effective response to the debt ordeal.

--Editors: Dan Liefgreen, Jeffrey Donovan

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

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


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