Bloomberg News

Monti Faces Resistance on Cabinet as Market Honeymoon Sours

November 15, 2011

(Updates with bonds in second paragraph, Alfano’s comments in ninth. For more on the region’s debt crisis, see EXT4.)

Nov. 15 (Bloomberg) -- Mario Monti, Italy’s premier-in- waiting, faced political resistance on forming a Cabinet as his market honeymoon turned sour, with Italian yields surging amid concern he’ll struggle to tame Europe’s sovereign-debt crisis.

As Monti engaged in the final day of talks on forming a government, the yield on Italy’s 10-year bond jumped to 7.06 percent at 1:10 p.m. Rome time, above the 7 percent threshold that prompted Greece, Ireland and Portugal to seek EU bailouts.

Monti, a former European Union competition commissioner, struggled yesterday to get political parties to agree to take part in his so-called technical Cabinet. A government lacking political representation may find it hard to muster support from parliament to pass unpopular laws.

“My commitment is aimed at making sure that politics can transform this difficult moment in a real opportunity for the nation,” Monti told a news conference in Rome yesterday. “The key thing is” to have the support of the parties, “without which I wouldn’t even take on this task, regardless of the physical presence” of politicians in the Cabinet, he said.

Monti held talks today with the leaders of the country’s two biggest parties, former Prime Minister Silvio Berlusconi’s People of Liberty and the Democratic Party, with neither indicating support for politicians in the government.

“Technical Character”

Speaking after the talks, Democratic Party leader Pier Luigi Bersani said he supported a Monti government with “a strong technical character.” Angelino Alfano, head of the PDL, said Monti’s bid to form a new government is “poised for success” and that implementing the austerity measures the Berlusconi government pledged to the EU “represent the cornerstone” of our support for Monti’s administration.

“A government without any parliamentarians in it will have problems,” Massimo D’Alema, a former premier and member of the opposition Democratic Party, said in an interview last night on state-run Rai3 television. ‘This will require that we give him some help in parliament.”

Antonio Di Pietro, head of the Italian Values party, told reporters yesterday after speaking with Monti that he was “unsure” whether the premier-in-waiting would end up agreeing to form a new government. Monti will likely announce his decision and possible Cabinet tomorrow, newspaper la Repubblica reported.

Borrowing Costs

Europe’s inability to contain a regional debt crisis that started in Greece more than two years ago led to a surge in Italian borrowing costs as investors bet on which nation may need aid next. Monti, an economist and former adviser to Goldman Sachs Group Inc., will try to reassure investors that Italy can cut a 1.9 trillion-euro ($2.6 trillion) debt and spur economic growth that has lagged behind the euro-region average for more than a decade.

As support for a Monti government built last week, 10-year bond yields narrowed more than 100 basis points from the euro- era record of 7.48 percent on Nov. 9 and the yield difference with German bund fell to six-day low of 446 basis points. The rally was short-lived, with the spread returning to 531 basis points at 1:10 p.m. in Rome.

Government Unraveled

President Giorgio Napolitano offered Monti the post of premier on Nov. 13, a day after Berlusconi resigned. Berlusconi’s government had unraveled after defections ended his parliamentary majority and the country’s 10-year bond yield surged to euro-era records.

Senate Deputy Speaker Emma Bonino, a member of the Radical Party, told reporters in Rome that “the situation is so serious it requires a direct involvement of politicians.”

Monti experienced his first market test yesterday when the Treasury sold 3 billion euros of five-year bonds, the top target for the auction, at the highest yield since 1997. Italy paid 6.29 percent, up from 5.32 percent at the last sale on Oct. 13. Italy faces 200 billion euros in maturing bonds next year.

“The economic and fiscal challenges facing Mr. Monti are daunting” as a country “expected to generate no growth next year is being asked to undertake one of the sharpest two-year fiscal adjustments in the euro zone,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e- mail. “Politically speaking, things could get very rough for Mr. Monti’s government.”

ECB Backstop

The European Central Bank has been buying Italian debt since Aug. 8 after the nation unveiled 45.5 billion euros in austerity measures, though the effort hasn’t been sufficient to stem borrowing costs. The ECB said yesterday it bought almost half as many bonds last week as in the previous week, with German council member Jens Weidmann saying that the “co-option of monetary policy for fiscal needs must come to an end.”

The EU has signaled it wants additional action by Italy to spur growth and trim debt as well as hasten implementation of the measures it’s already passed, which include raising the retirement age, opening up closed professions and selling real- estate assets. EU and ECB inspectors arrived in Italy last week to review progress and Berlusconi also agreed to International Monetary Fund monitoring of Italian finances.

EU Commitments

“An attempt to restrict the government to implementing the economic commitments promised to the EU and IMF, or placing a strict time limit on its duration in office, would curtail any possibility of a strong government,” Eoin Ryan, an analyst at IHS Global Insight in London, said in an e-mailed note. “The markets are expecting a bigger response than this.”

Berlusconi was the fourth leader of a southern EU nation to be brought down by fallout from the debt crisis, after Greek Prime Minister George Papandreou resigned last week, Spanish Prime Minister Jose Luis Rodriguez Zapatero decided not to seek re-election this month and Portuguese Premier Jose Socrates stepped down in March after parliament nixed his austerity plan.

Monti has said he’ll focus on fixing public finances and boosting economic growth. Both houses of parliament must hold confidence votes to confirm the new government, which should be in place before Nov. 18, Chamber Speaker Gianfranco Fini said yesterday.

--With assistance from Chiara Remondini in Milan and Anchaelee Worrachate in London. Editors: Jeffrey Donovan, Heather Langan, Andrew Davis

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

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net


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