Saturday, 6 August 2011

Italy Vows Faster Fiscal Consolidation

ROME—Italian Prime Minister Silvio Berlusconi pledged to loosen up the country's labor market and said Italy would balance its country's budget by 2013, a year earlier than planned, in an effort to to quell weeks of market concerns that the euro-zone's third-largest economy will be drawn into the continent's escalating debt crisis.

Speaking in a hastily called news conference Friday evening in Rome, Mr. Berlusconi said the country would introduce a balanced-budget amendment in its constitution as part of an agreement with European Union authorities. He also said the country would take the necessary moves to push ahead with a major liberalization program aimed at injecting growth into the country's anemic economy.

International market pressure on Italy's public finances require coordinated response by many states, Mr. Berlusconi said. He said he had spoken with other European leaders, including German Chancellor Angela Merkel. Ms. Merkel discussed financial markets and the euro zone with other EU leaders Friday, a German official said, and was scheduled to have a talk with U.S. President Barack Obama.
Market "speculation is now aimed at us," and Italy and fellow euro-zone nations must take action to block it, Mr. Berlusconi said during the news conference, which he held jointly with Economy Minister Giulio Tremonti.

Later Friday, people familiar with the European Central Bank said the bank is open to the prospect of purchasing government bonds of Spain and Italy, but has made no firm commitment to do so.

The ECB purchased government bonds on Thursday and Friday for the first time in more than four months, but those purchases were limited to Ireland and Portugal. Many analysts say those purchases need to be broadened to Spain and Italy in order to keep the debt crisis from engulfing those countries.

Around midday New York time, Reuters reported that the ECB had agreed in principle to buy Italian and Spanish bonds, on condition that the countries make fiscal reforms. The report couldn't be confirmed and there was no sign that the central bank had actually moved to buy bonds of those countries, but the report helped boost stocks in the U.S. and gave a lift to the euro.

Mr. Berlusconi also said work on a constitutional amendment requiring a balanced budget will begin immediately, with relevant parliament and Senate committees already ordered to stay in Rome next week to hammer out the details.

Underscoring the urgency at the end of the day—in which Italian sovereign debt yields hit their highest spread ever against Germany's since the single currency began—Mr. Berlusconi said budgetary and other reforms should be implemented "in a few months, and maybe by September."

Mr. Berlusconi's move came as policymakers across Europe grasped Friday for solutions to an immense problem: For months they have been working in fits and starts to convince financial markets that they had the tools to help Spain if that country tumbled into a sovereign-debt crisis.

But now it's suddenly larger Italy that appears to be zooming toward the precipice. And there is no plan in place to help it.

The bloc's sovereign bailout fund is far too small simply to lend Italy money to cover its bills, as it is doing for smaller bailout recipients. Endowing the fund with enough firepower would be impose a huge burden on Germany, France and other stronger countries, and could well imperil their own credit ratings.

The ECB is deeply reluctant to buy bonds of weak countries to prop up their prices; it has been doing it in relatively small quantities for Greece, Ireland and Portugal. Diving into the Italian bond market would require a far bigger outlay from the ECB and would add commensurate risk to the central bank's own balance sheet.

Faced with this palette of unpleasant option, European capitals jumped into round-robin telephone calls Friday that included Mr. Berlusconi, Ms. Merkel, French President Nicolas Sarkozy and Spanish premier José Luis Rodriguez Zapatero. Mr. Obama was also scheduled to speak to his European counterparts, officials said.

Mr. Berlusconi and Mr. Zapatero discussed recent developments in debt markets, noting that recent "fluctuations and speculative movements in sovereign-debt markets were incomprehensible," according to Mr. Zapatero's office. Messrs. Zapatero and Sarkozy, in turn, focused on the implementation of crisis-fighting measures agreed by European leaders last month, the office added.

In Brussels, the EU's economy commissioner, Olli Rehn, interrupted a vacation in Finland to urge the euro zone's 17 countries to pull together a plan, and fast.

"I think experience has really shown that we need to be ready to adapt our crisis-management tools ahead of the curve," Mr. Rehn said at a press conference Friday.

His spokeswoman, Chantal Hughes, later said Mr. Rehn believed the euro zone should be ready, if needed, to expand its main bailout fund beyond the €440 billion capacity that has already been promised, though not delivered.

That may not be easy: Some national governments, most importantly Germany and the Netherlands, remain lukewarm about boosting the fund.

That could elevate—uncomfortably—the ECB's crisis-fighting role. The bank has been adamant that its chief remit is monetary policy and that governments need to work on repairing their fiscal houses.

The ECB on Friday again stuck to purchasing Irish and Portuguese bonds and not those of Spain or Italy, despite criticism that these purchases wouldn't prevent the crisis from spreading.

Markets remained on edge over the ECB's stance toward Spanish and Italian bond purchases. Investors appear to have focused skeptically largely on the ECB's reluctance to fully engage in the program, rather than its willingness to reach back into its tool kit.

Additional details emerged suggesting a North-South divide within the ECB on renewal of bond purchases. Germany's representative on the ECB Executive Board, Jürgen Stark, joined German central bank head Jens Weidmann in opposing plans to reactivate the ECB's bond-buying program, a person familiar with the matter said.

In addition, at least one central banker from the Benelux region in northern Europe also opposed restarting the program, this person said. A spokesman for the ECB declined to comment Friday.

"If it really turns out that the main ECB response to a major Italian emergency is to buy a limited amount of Portuguese and Irish bonds, then [Thursday's] ECB decision may go down in history as its worst blunder yet," Holger Schmieding, chief economist at Berenberg Bank, said in a research note.

An ECB official suggested early on Friday that the central bank is wary of buying Spanish and Italian bonds until those countries take added steps to reduce government debt levels.

Agence France-Presse/Getty Images
French President Nicolas Sarkozy and German Chancellor Angela Merkel
 chat at the start of a June summit of the EU heads of State.

The ECB "is ready to make major efforts to help the situation, but countries have to do what is necessary first, otherwise it's just like pouring water into a bucket with a hole in it," Belgium's central bank governor Luc Coene told a Belgian radio station, when asked about Spain and Italy.

Mr. Coene admitted the ECB's bond buys Thursday "clearly didn't help if you look at the market reaction."

Authors | Source | The Guardian |


William Horobin, Tom Fairless, Bernd Radowitz and Frances Robinson contributed to this article.

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