Bloomberg News

Monti to Present Program With Yields at Bailout Levels

November 17, 2011

(Updates with markets in first-second paragraphs. For more on the region’s debt crisis, see EXT4.)

Nov. 17 (Bloomberg) -- Nov. 17 (Bloomberg) -- Italian Prime Minister Mario Monti will seek parliamentary support for a package of measures designed to tame the euro region’s second- biggest debt as bond yields remain above the 7 percent bailout threshold.

The yield on Italy’s benchmark 10-year bond rose 6 basis points to 7.07 percent, the third day it held above the level that that led Greece, Portugal and Ireland to seek European Union aid, Monti, 68, will test parliamentary support for his technocrat government today when he presents his program in the Senate in Rome at 1 p.m. before facing a confidence vote in his new government beginning at 8 p.m.

“We expect that the priorities will be liberalizations and measures to boost competition, the reform of the labor market and more incisive action on the pension system,” Chiara Corsa and Loredana Federico, Milan-based economists at UniCredit SpA, wrote in a note to investors. “An additional fiscal adjustment to meet the balanced budget in 2013 will probably be announced.”

Monti, who doesn’t have any members of parliament in his Cabinet, was sworn in yesterday after spending two days lobbying the nation’s parties for their support. Almost all the political formations agreed to back his confirmation, though how firm their support will be once he starts overhauling pension spending, labor rules and tax policies remains to be seen.

Limited Support

Former Prime Minister Silvio Berlusconi’s People of Liberty party said it would vote for the Monti government, though that support was limited to backing the implementation of austerity measures announced by Berlusconi before he resigned on Nov. 12. Monti is considering reviving a property tax eliminated by the Berlusconi government and introducing a wealth tax, another measure opposed by Berlusconi, newspapers including Corriere della Sera have reported.

Monti’s team “is a well-intentioned government with ambitious hopes vested in it,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e- mail. “It remains to be seen whether its apolitical character becomes an asset or a liability.”

Double Portfolio

Monti signaled his commitment to playing a central role in driving economic policy by keeping the portfolio of finance minister for himself. He also named Corrado Passera, chief executive officer of Intesa Sanpaolo SpA, as his economic development minister.

The confidence vote comes one day after Greek Prime Minister Lucas Papademos, another technocrat, won a confidence vote in Athens, receiving a mandate to push through budget measures to secure EU financing to avert default. Papademos replaced George Papandreou, who like Berlusconi was brought down by fallout from the debt crisis. In Spain, opinion polls indicate the ruling Socialist Party, which has seen its support evaporate as the debt crisis deepened, will be trounced in elections on Nov. 20.

Italy is trying to tame a debt of 1.9 trillion euros ($2.6 trillion), more than Spain, Greece, Portugal and Ireland combined, and the jump in bond yields is already raising borrowing costs in a country that needs to sell about 440 billion euros of debt next year. The Treasury had to offer a yield of 6.29 percent, the highest since 1997, on five-year bonds at an auction on Nov. 14.

‘Signals of Encouragement’

“We have had many signals of encouragement from our European partners and the international community,” Monti told reporters after presenting his cabinet yesterday. “I am confident that all this, although at a complicated time, will translate into a calming of market difficulties, specifically those concerning our country.”

French President Nicolas Sarkozy was one of those offering support, saying in a letter to Monti yesterday that he was “convinced” that Italy’s austerity efforts would lead to a path of “stability and growth.”

The drop in Italian bonds today, led the yield difference with Germany to increase. That spread widened 8 basis points to 527, more than twice the average for the past year.

Borrowing Costs

Italy’s soaring borrowing costs won’t have a lasting impact, Maria Cannata, the Treasury’s director of public debt, said at a conference in Milan yesterday.

“Next year we have to sell 440 billion; it sounds prohibitive but it’s not, even if things have gotten more complicated because investors are frightened by the volatility in markets,” Cannata said.

Monti 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 EU has signaled it wants additional action by Italy to spur growth and cut debt and to speed implementation of the measures already passed by the Berlusconi government. 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.

New Government

The new government first faces a confidence votes in the 321-seat Senate, where Monti can likely rely on 297 votes, based on the parties that announced their support in consultations. In the lower house, where he faces the final confidence vote tomorrow, he is expected to have at least 560 votes out of 630. Monti’s success will hinge on maintaining that backing once he begins delivering austerity measures. The lower house is scheduled to begin voting at 2 p.m. tomorrow.

“The first step is to have a wide majority in parliament not only approving the new government in the next two days, but also approving in the next weeks and months the structural reforms that Italy needs,” Mario Baldassarri, chairman of the Italian Senate Finance Committee and a member of the centrist Third Pole alliance, said in an interview with Bloomberg Television. “This is what we will have to check week after week.”

In both chambers, Monti will face opposition from Berlusconi’s key ally, the Northern League, which didn’t show up for their scheduled consultations with Monti on Nov. 14.

Property Tax

“Monti will try to present the plans of his government with the ‘coupling technique,’ simultaneously announcing measures that will make both of the main parties unhappy,” said Roberto d’Alimonte, professor of politics at Luiss University in Rome. They may be “the reintroduction of the main property tax which Berlusconi’s party doesn’t want and some new legislation on the pension system and the labor market which the Democratic Party or some of its lawmakers oppose.”

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.

The country already has a primary surplus, which could send the debt on a declining trajectory starting next year. Still, anemic economic growth and the Berlusconi government’s struggle to shore up the public finances led investors to increase their bets against Italy in recent months.

--With assistance from Chiara Vasarri in Rome. Editors: Andrew Davis, Kevin Costelloe, Jerrold Colten

To contact the reporter on this story: 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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