(Updates with Monti accepting in second paragraph. For more on the region’s debt crisis, see EXT4.)
Nov. 16 (Bloomberg) -- Italian Prime Minister-designate Mario Monti will announce his new government today as he strives to convince investors he can trim Europe’s second-biggest debt and fend off contagion from the euro-area sovereign crisis.
Monti, 68, told President Giorgio Napolitano that he would accept the post and the two men were still reviewing his Cabinet choices in a meeting that began in Rome around 11 a.m., Pasquale Cascella, a spokesman for Napolitano’s office said.
Two days of consultations with parties, unions and employers left him “convinced” that Italy can overcome the crisis, he said yesterday. Italian bonds gained for the first day in three, with the 10-year yield falling 15 basis points to 6.92 percent at 12:30 p.m. in Rome.
Once sworn in, Monti must show he’s serious about cutting the world’s fourth-biggest debt to restore confidence among investors who have shunned Italian bonds and sent financing costs to 15-year highs. The premier-designate will be under pressure to demonstrate that his Cabinet of technocrats can secure support in the legislature for the tax increases and benefit cuts needed to trim total borrowing of 1.9 trillion euros ($2.6 trillion).
Italy’s 10 year-bond yield opened today above the 7 percent threshold that prompted Greece, Ireland and Portugal to seek EU before bonds began to gain. The cost of insuring Italian government debt against default fell 12 basis points to 583 basis points, after surging to a euro-era record 589 basis points yesterday.
“The bottom line is that the market wants to get more than a ‘Super Mario’,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “There is an urgent need for a solid, up-and-running team that will take politically painful but necessary growth-enhancing and fiscal consolidation measures.”
Monti will initially hold the post of finance minister, and may name Vittorio Grilli, director general of the treasury as one of his deputies, Corriere della Sera reported without saying where it got the information. Corrado Passera, chief executive officer of Intesa Sanpaolo SpA, may be named industry minister, the newspaper said. No figures linked to any of the country’s political parties will be in the Cabinet, the paper said.
In yesterday’s talks, the main political parties offered support to Monti’s technocrat government, though they resisted his appeal to offer up Cabinet ministers and take a direct stake in the new administration.
Democratic Party leader Pier Luigi Bersani said he supported a government with “a strong technical character.” Angelino Alfano, head of outgoing Prime Minister Silvio Berlusconi’s People of Liberty party, said implementing austerity measures already pledged to the EU “represents the cornerstone” of their support for Monti.
That political backing may be vital to Monti’s success should Italians turn against his efforts once further austerity measures are introduced. The government may be forced to sell off state assets, introduce property and wealth taxes and cut spending on health care, pensions and education, said Nicola Marinelli, who oversees $153 million at Glendevon King Asset Management in London.
“When all this is clear to the wider public, I think that the public backlash would be such that the parties that are backing him today, in a lukewarm and forced way, will change course quicker than Lady Gaga changes dresses,” Marinelli said.
Monti included unions and employers in his talks and he said they understood that sacrifices would be necessary.
His swearing in, which is likely today, will end a tumultuous week that saw Berlusconi’s parliamentary majority evaporate on Nov. 8, prompting his offer to resign once the legislature passed economic-growth legislation pledged to the EU. After both houses of parliament rushed passage of the plan, Berlusconi stepped down on Nov. 12. Napolitano then held talks with all parties before reaching outside the political arena to ask Monti to form a government.
Italy’s deficit, at 4.6 percent of gross domestic product last year, is about the same as Germany’s, lower than that of France and less than half the U.K.’s, at 10.3 percent. Still, its debt load is bigger than that of Spain, Greece, Ireland and Portugal combined.
The country’s primary surplus could put the debt on a declining trajectory starting next year. Still, anemic economic growth and the Berlusconi’s government struggle to shore up public finances led investors to bet against Italy’s taming its borrowing and sent financing costs soaring.
The Treasury sold 3 billion euros of five-year bonds to yield 6.29 percent on Nov. 14, the highest since 1997. Italy faces 200 billion euros in maturing bonds next year.
Monti, an economist who is president of Bocconi University in Milan, the country’s top business school, also needs to persuade the European Central Bank to continue to backstop the country’s debt.
The ECB began buying Italian debt on 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 bought almost half as many bonds last week as it did in the previous week.
The EU has signaled it wants additional action by Italy to spur growth and trim debt as well as hasten implementation of measures it has already passed. They include increasing the retirement age, opening up closed professions and selling real- estate assets. EU and ECB inspectors arrived in Italy last week and Berlusconi also agreed to have Italy’s finances monitored by the International Monetary Fund.
--With assistance from Lukanyo Mnyanda in London. Editors: Andrew Davis, Jeffrey Donovan
To contact the reporters on this story: Chiara Vasarri in Rome at firstname.lastname@example.org Lorenzo Totaro in Rome at email@example.com
To contact the editor responsible for this story: John Fraher at firstname.lastname@example.org