Bloomberg News

Berlusconi Rushes to Pass Debt Measures as Yields Soar

November 09, 2011

(Updates with quote in fourth paragraph, details of amendment from seventh paragraph. For more on the region’s debt crisis {EXT4 <GO>})

Nov. 9 (Bloomberg) -- Italy’s government presented lawmakers with the budget measures pledged to European Union allies, paving the way for parliamentary votes this week that will lead to Prime Minister Silvio Berlusconi’s resignation.

Finance Minister Giulio Tremonti delivered the legislation, to the Senate today in Rome in the form of an amendment to the budget law. The measures are aimed at convincing investors Italy can overhaul its economy to reduce the euro-region’s second- biggest debt. The Senate will vote on the plan on Nov. 11, and the Chamber of Deputies will seek to pass it by Nov. 13.

Italy’s bond yields surged past the 7 percent threshold that prompted Greece, Portugal and Ireland to seek bailouts after Berlusconi’s majority unraveled yesterday and LCH Clearnet SA said it would demand additional collateral on Italian debt. Months of bickering within Berlusconi’s Cabinet over the budget measures ended up fueling the collapse of the government and the selloff of the country’s debt.

“Italy is now in a dance of death,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said in a telephone interview. “What we need is a strong reaction from other euro zone leaders to calm markets. But we don’t have it.”

Bonds Slump

The yield on Italy’s 10-year bond surged 48 basis points today to 7.246 percent, the highest close since the introduction of the euro in 1999. The yield on the five-year bond also closed above 7 percent, with two-year Italian notes yielding more than 10 percent.

The political turmoil in Italy coupled with Greece’s inability to name a new prime minister, contributed to declines in the euro and a slump in stocks. The single currency slid to a one-month low and Treasuries rallied, with the Standard & Poor’s 500 Index lost 3.8 percent at 3:45 p.m. in New York, its worst drop in more than two months.

The measures presented to the Senate today include a pledge to raise 15 billion euros ($20 billion) from real estate sales over the next three years, a two-year increase in the retirement age to 67 by 2026, opening up closed professions within 12 months and the gradual reduction in government ownership of local services.

EU Letter

All the measures announced today had been included in a letter presented by Berlusconi to European allies at an Oct. 26 summit after the EU and the European Central Bank pressured Italy to do more to spur growth and cut a debt of 1.9 trillion euros, more than Greece, Spain, Ireland and Portugal combined.

The amendment failed to deliver some measures pledged to the EU, such as making it easier for companies to fire workers during economic downturns. The bill did include tax incentives to hire apprentice workers, though won’t seek to modify Article 18 of the labor code, which restricts firing practices.

Italy’s bond yields began to climb in July as Europe’s failure to contain Greece’s debt woes fueled contagion. Italy’s deficit of 4.6 percent of gross domestic product last year is similar to that of Germany’s at 4.3 percent and less than that of the U.K. and France. The country has a primary surplus and its debt is barely rising. Still, at 120 percent of GDP, second only to Greece, the debt load began to spook investors in a country where economic growth has trailed the EU average for more than a decade.

ECB Backstop

In August the government announced a 45 billion-euro package of austerity measures to balance the budget in 2013. The plan helped convince the European Central Bank to backstop Italian debt. The ECB has spent more than 100 billion euros since beginning its purchases of Italian and Spanish bonds on Aug. 8, an effort that has failed to stem the rise in yields.

The surge in bond yields is driving up borrowing costs in Italy, which is set to spend 77 billion euros this year in financing costs. Italy faces about 200 billion euros of bond maturities in 2012 and may struggle to lure investors when it sell 5 billion euros of one-year bills tomorrow and as much as 3 billion euros of five-year bonds on Nov. 14.

Berlusconi offered to resign after defections from his ruling People of Liberty party left him yesterday without a majority in Parliament. Once the debt measures are passed, Berlusconi will step down and President Giorgio Napolitano will begin consultation with all the political parties to see if they can agree to form a new government, or whether Italy will go to elections.

Unity Government

Confindustria, the country’s employers lobby, and the Italian Banking Association called for politicians to agree to a government of national unity to help restore confidence.

Napolitano could also seek to form a technical government, choosing someone from outside the political arena to lead a new administration given a limited mandate to carry out reforms and prepare for elections. Former EU Competition Commissioner Mario Monti has been called a possible candidate.

Napolitano today named Monti as a Senator for Life, an honorary position granted people who have distinguished themselves in service to the country.

--Editors: Andrew Davis, Kevin Costelloe

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

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


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