Bloomberg News

Berlusconi Says Italy Risks Losing Credibility on Follow-Through

October 27, 2011

Oct. 27 (Bloomberg) -- Prime Minister Silvio Berlusconi warned that Italy will lose its credibility unless it lives up to pledges made to the European Union last night on overhauling the economy and reducing the euro area’s second-biggest debt.

“If we don’t respect our commitments, we won’t be credible anymore,” Berlusconi told reporters in Brussels earlier today. His comments came after euro-area leaders urged Italy to pursue an “ambitious timetable” to boost economic growth and cut debt that amounts to about 120 percent of output, the second most in the region after Greece.

The premier also said that Italy “isn’t Greece” and will avoid the social unrest that has hit its Mediterranean neighbor amid a wave of austerity measures, even as unions threatened to take to the streets to protest his bid to gradually raise the pension age and ease laws on firing workers.

The pressure on Berlusconi underscored a push by European leaders to prevent the Greece-fueled debt crisis from swamping the third-biggest euro economy and piling risks onto France and Germany. Berlusconi may struggle to carry out his vows amid political bickering and labor opposition, with Italian borrowing costs still near record highs even as the European Central Bank continues to prop up the nation’s debt.

“The rise in retirement age will happen gradually” and won’t “bring any benefits to the public finances in the near term,” Riccardo Barbieri, chief European economist at Mizuho International Plc in London, wrote in an e-mailed note. “This is just a temporary compromise and pressure on Italy to deliver sweeping reforms will return.”

Yield Drops

The yield on Italy’s 10-bond was at 5.81 percent as of 1:57 p.m. in Rome, down 10 basis points from yesterday’s close. The premium investors demand to hold the securities rather than German bunds of equivalent maturity was 365 basis points, down from 388 basis points.

In a letter to the European Commission, Berlusconi vowed to raise 5 billion euros ($8 billion) annually for the next three years from asset sales and increase the retirement age to 67 by 2026, from about age 65 for men. Italy will also overhaul labor laws in a country where most young workers have no job security and older ones are hard to fire.

While Berlusconi said the plan was “well-received” by policy makers, CGIL, Italy’s biggest labor-union group, called the proposals “one-sided” and a “nightmare,” according to a statement posted on its website. CGIL said the government should combat tax evasion and introduce a levy on assets rather than “punishing” workers.

‘Mobilization’

CGIL leader Susanna Camusso said the group is now considering a “unified mobilization” of workers to protest the measures in the letter. Raffaele Bonanni, leader of the CISL union, told RAI2 television in an interview that he’s ready to strike “if firing laws are changed without the agreement” of labor organizations.

European policy makers, responding to global pressure to end the debt crisis, concluded 10 hours of overnight talks in Brussels today by announcing an agreement for bondholders to take 50 percent losses on Greek debt and a plan to boost the firepower of the region’s rescue fund to 1 trillion euros ($1.4 trillion).

Berlusconi’s letter did not give specifics about the asset sales, though achieving the target of 5 billion euros of revenue a year will have little impact on a debt of almost 1.9 trillion euros. The 14-page letter contained few new proposals, while euro-area leaders called on Italy to define by year-end the process to achieve an increase of the retirement age.

Calls to Resign

The retirement-age change and austerity measures totaling more than 100 billion euros have deepened divisions in Berlusconi’s coalition, fueling calls for elections to be held before the legislature’s term ends in 2013.

Berlusconi dismissed a report that he will resign in January in comments last night on Porta a Porta, a show on state-run RAI television. Repubblica newspaper said yesterday that the premier had agreed to step down and hold a vote next March in order to secure support for the pension plan from the Northern League, which underpins his coalition.

“Italy’s biggest challenge will be to deliver” its promised measures “in full,” Vladimir Pillonca, an economist at Societe Generale SA in London, said by e-mail. “The fragile political landscape merely reinforces the concerns over potential policy dilution.”

Economic growth in the euro area’s third-biggest economy has lagged behind the European average for more than a decade. A focus on growth and more debt reduction was demanded by the ECB, which began buying Italian bonds on Aug. 8, helping bring yields down from euro-era records.

Cabinet bickering over implementing the austerity measures has undermined the ECB’s effort, with the 10-year bond now yielding almost 6 percent, compared with the Aug. 5 peak of 6.4 percent before the ECB started backstopping the debt.

--With assistance from Lorenzo Totaro and Flavia Rotondi in Rome. Editors: Jeffrey Donovan, Leon Mangasarian

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

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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