Bloomberg News

Monti Set to Lead New Government as Italy Battles Contagion

November 15, 2011

(Updates with bond yields in sixth paragraph, auction in seventh, stock market in ninth. For more on the region’s debt crisis, see EXT4.)

Nov. 14 (Bloomberg) -- Former European Union Competition Commissioner Mario Monti will head a new government as Italy reaches outside the political arena for a leader to restore confidence in its ability to cut the euro region’s second- biggest debt.

President Giorgio Napolitano offered Monti, 68, the post last night in Rome, less than 24 hours after Prime Minister Silvio Berlusconi resigned. Berlusconi’s government unraveled after defections ended his parliamentary majority and the country’s 10-year bond yield surged over the 7 percent threshold that prompted Greece, Ireland and Portugal to seek EU bailouts.

“In a particularly difficult moment for Italy, in a very turbulent European and international landscape, the country must prevail in the challenge of redemption,” Monti said last night after meeting Napolitano in Rome. “Italy must once again be an element of strength, not of weakness, in the European Union, which we helped found and in which we must be protagonists.”

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

Democracy ‘on Hold’

“The democratic process is being put on hold, but Italians feel this is the right thing to do,” Giuseppe Ragusa, an economics professor at Rome’s LUISS Guido Carli University, said in an interview with Bloomberg Television’s David Tweed in Rome today. “More than austerity reform, he should place the debate on redesigning the labor market because with that comes redesigning the Italian productive system.”

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 basis points on Nov. 9. The yield fell 2 basis points to 6.42 percent at 11:45 a.m. in Rome, the lowest in since Nov. 4. The difference with German bonds rose 2 basis points to 458 basis points, down from the euro-era record of 576 basis points Nov. 9, more than twice the average for the year.

Stocks Gain

Monti experienced his first test in the markets today 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. Demand was 1.47 times the amount on offer, compared with 1.34 times last month.

“Credibility has been lost and it will take a while for market participants to believe that the country is back on the right track,” Annalisa Piazza, an economist at Newedge Group in London, said in a note to investors after the auction.

Italy’s benchmark FTSE MIB stock index was up 0.5 percent at 11:44 a.m. in Milan. Banks led the gains, with UniCredit SpA up 1.64 percent and Intesa Sanpaolo SpA adding 1.8 percent.

“Monti’s appointment is clearly a positive for markets,” Emanuele Vizzini, chief investment officer at Investitori Sgr in Milan, who oversees assets of about 700 million euros, said in an interview. “This is a first step in the right direction, which will help Italy’s credibility issue.”

Technical Governments

Italy has a tradition of reaching outside parliament for leaders to run so-called technical governments at times of political crisis. Monti, who did his graduate work in economics at Yale University, spent almost a decade in Brussels as EU commissioner and has been running the Bocconi University in Milan, the country’s top business school, since 1994.

Berlusconi is the fourth leader of a southern EU country to be brought down by fallout from the debt crisis, with new administrations pledging to impose austerity measures demanded by the union and the International Monetary Fund.

Greek Prime Minister George Papandreou resigned last week to make way for a coalition led by European Central Bank Vice President Lucas Papademos. Spanish Prime Minister Jose Luis Rodriguez Zapatero decided not to seek reelection and polls show Mariano Rajoy, leader of the conservative People’s Party, will win an absolute majority in the Nov. 20 vote. Portuguese Prime Minister Jose Socrates resigned in March after parliament rejected his government’s deficit-cutting plan.

‘More Europe’

People in the region “want more Europe, not less,” Erik Nielsen, global chief economist at UniCredit SpA, wrote in a note to investors yesterday. “While few people like to see their individual benefits being cut, or their individual taxes hiked, the broader sentiment in southern Europe is that people want core-Europe-quality institutions and stability.”

Monti must present the names of his Cabinet ministers to Napolitano before he can be sworn in. He will then face confidence votes in both houses of parliament. Leaders of Berlusconi’s People of Liberty party told Napolitano yesterday they’ll support a Monti government, virtually ensuring his confirmation, which may come this week.

Monti said he will focus on improving public finances and boosting economic growth, and he pledged to decide on his Cabinet as quickly as possible. Press speculation about who will be in the Cabinet is “pure fantasy,” he said.

European Commission President Jose Barroso and EU President Herman Van Rompuy welcomed Napolitano’s decision to offer Monti the chance to lead Italy’s government.

“We believe that it sends a further encouraging signal,” following Italy’s “swift adoption” of the budget law, they said in an e-mailed statement yesterday.

EU Pressure

The EU has been stepping up pressure on Italy to hasten implementation of growth measures needed to trim its debt. EU and ECB inspectors were in Italy last week to review progress and Berlusconi also agreed to let the IMF monitor implementation.

“Italy has a potentially high economic performance, yet it needs huge efforts to unleash it in a structural and permanent fashion,” Van Rompuy said in a speech near Florence on Nov. 11. “Both Europe’s and Italy’s fates are at stake,” he said.

As the region’s debt crisis began to spread, Italy initially fared better than Greece, Ireland and Portugal, which were forced to seek 256 billion euros in bailouts. Italy’s budget deficit of 4.6 percent of gross domestic product last year is similar to that of Germany and less than France’s 7.1 percent and the U.K.’s 10.3 percent.

The country has a surplus in its primary budget, which excludes debt-interest payments, and its debt is set to start declining from next year. About half of government bonds are owned by domestic investors and the country has one of the highest savings rates in Europe. Italy’s main banks passed two rounds of EU stress tests.

--With assistance from Chiara Remondini in Milan and Anchaelee Worrachate in London. Editors: Jerrold Colten, Jeffrey Donovan

To contact the reporters on this story: Andrew Davis in Rome at abdavis@bloomberg.net abdavis@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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