Bloomberg News

Monti’s Budget Plan Gets Final Approval in Italy Parliament

December 23, 2011

(Adds economist’s comment in fourth paragraph, closes markets in fifth. For more on Europe’s debt crisis, click EXT4.)

Dec. 22 (Bloomberg) -- Prime Minister Mario Monti’s emergency budget plan won final approval in Parliament today as Italy struggles to tame surging borrowing costs before facing 53 billion euros ($69 billion) in debt repayments early next year.

The Senate voted 257 to 41 to approve the 30 billion-euro package in a confidence vote in Rome. The legislation, dubbed by Monti the “Save Italy Decree” and the nation’s third austerity plan since June, was passed by the Chamber of Deputies in a 402- to-75 vote last week.

The plan includes a pension overhaul, a levy on primary residences and a crackdown on tax cheats, all measures aimed at convincing investors Monti is serious about cutting the euro region’s second-largest debt and meet the commitment of balancing the budget in 2013. It may also push Italy, which must sell 440 billion euros in debt next year, deeper into a recession that is forecast to begin in the current quarter.

“The austerity package will be sufficient to bring the deficit-to-GDP ratio down to zero,” UniCredit SpA economists Chiara Corsa and Loredana Federico, both based in Milan, wrote in a note to investors today. “The pension reform is by all means a major achievement, which shows the government’s commitment to reduce public spending in a structural way.”

The yield on the benchmark 10-year bond rose to 6.92 percent, up 13 basis points from yesterday. The difference with equivalent-maturity German bonds climbed to 497.3 basis points.

Italy’s ‘Credibility’

“Our country’s credibility is essential to overcome the crisis, just as it’s also essential for our economy to return to growth,” Monti told Senators before the vote.

Monti, who leads an administration made up of unelected ministers, relied on the support of former Prime Minister Silvio Berlusconi’s People of Liberty party and the Democratic Party, Parliament’s main groups. The Northern League, Berlusconi’s former governing ally, voted against the package, as did the Italian Values party of former magistrate Antonio Di Pietro.

“The ‘Save Italy Decree’ won’t save Italy, it will bury it,” Northern League leader Umberto Bossi said before today’s vote, according to Ansa newswire. “It’s got too many taxes and above all, it doesn’t create jobs.”

Italy’s economy shrank 0.2 percent in the third quarter from the previous three months, when it grew 0.3 percent, statistics institute Istat said yesterday. The government forecasts a shrinking economy in the fourth quarter, 0.6 percent growth in 2011 and a 0.4 percent contraction next year.

Record Costs

Italy’s 10-year bond yield reached a euro-era record 7.48 percent on Nov. 9, three months after the European Central Bank started buying the country’s bonds to fight the debt crisis. The Treasury had to pay 6.47 percent to sell five-year debt at its last auction on Dec. 14, the most in more than 14 years.

Italy has to repay about 53 billion euros in the first quarter from the euro region’s total maturing debt of 157 billion euros, according to UBS AG. It owes a further 3.2 billion euros in interest payments based on the average five- year yield of the past three months.

Monti’s emergency package, which also aims to balance the budget in 2013, will cut 0.5 percent from gross domestic product over the next two years while reducing public debt, Bank of Italy Governor Ignazio Visco told Parliament on Dec. 9. Some of the drag on growth may be offset if borrowing costs are brought down, he said.

‘Buy Bonds’

“To overcome the sovereign debt crisis, it’s vital that everybody look at our debt with confidence,” Monti told upper- house lawmakers. “It is essential that Italians buy government bonds and treasury bills, whose yields are very high. We must trust ourselves.”

Italy will remain in a recession until the second half of next year, employers’ lobby Confindustria said in a Dec. 15 report. The $2.3 trillion economy will contract 1.6 percent in 2012 after growing 0.5 percent this year, the lobby said.

Monti said last week his government is preparing a plan to spur economic growth led by Development Minister Corrado Passera, a former chief executive officer of Intesa Sanpaolo SpA, Italy’s second-biggest bank. The plan will seek to overhaul labor laws and the welfare system, Monti said.

The vote came one day after the International Monetary Fund concluded a short visit to Rome as part of its monitoring program. The two-person IMF team “received updates on budgetary developments” and discussed the missions “requested by the Italian authorities” that will take place early next year, the Washington-based lender said yesterday in a statement.

--Editors: Jeffrey Donovan, Dan Liefgreen

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#<684303.724904.2.1.95.14779.25># -0- Dec/22/2011 17:05 GMT

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

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


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