Tags: EU | Italy | Financial | Crisis

Prospect of Monti Leading Italy Calms Jitters, for Now

Thursday, 10 November 2011 11:59 AM

The prospect of an Italian government led by leading economist Mario Monti helped calm market jitters Thursday that the country was heading for a Greek-style economic crisis that would threaten the very existence of the euro currency itself.

With a groundswell of Italian politicians voicing support for a technocratic government led by the former European Union competition commissioner, there's a growing degree of confidence that the transition from Silvio Berlusconi will be swift.

As in Greece, where economist Lucas Papademos was appointed prime minister Thursday, there are hopes that Monti's experience of global financial circles and his non-involvement in his country's partisan politics will help calm markets.

Italy's ten-year borrowing rate slid sharply Thursday and back towards levels that are considered manageable — for now. On Wednesday, the rise in the country's ten-year bond yield to well over 7 percent stoked panic in financial markets that Italy was heading the same way as much-smaller Greece, Ireland and Portugal in needing to outside help.

Monti has become favorite to lead Italy out the financial morass after Wednesday's surprise move by President Giorgio Napolitano's to name him a senator for life. Napolitano also offered emphatic assurances to skittish investors that Berlusconi will step down, as promised, after reforms are passed — likely by Saturday.

In what may bode well for a smooth transition, Berlusconi congratulated Monti on his new post in a telegram, wishing him "fruitful work in the country's interest" and recognizing his accomplishments.

Italy is under intense pressure to prove it has a strategy to deal with its debts, which stand at 1.9 trillion euro ($2.6 trillion), or a huge 120 percent of economic output — it has to rollover a little more than 300 billion euros of its debts next year alone. But economic growth is weak and the government failed to enact reforms to revive it over the past decade.

With the eurozone and global economies at risk in the event of an Italian default, European governments are pushing Italy to clear up questions over its political leadership quickly.

"It is very important ... that Italy wins back its credibility," German Angela Merkel told reporters in Berlin. "That means the austerity package being implemented very quickly, as is now the plan, and above all the political leadership being clarified as quickly as possible — because I think that is very important for Italy's credibility."

Investors are worried that if Italy's borrowing rates remain too high for too long, it will be blocked out of financial markets and need rescue loans to repay its bondholders. That could be devastating for both the euro and the global economy.

Europe has already bailed out Greece, Portugal and Ireland — but together they make up only about 6 percent of the eurozone's economic output, in contrast to Italy's 17 percent.

Political sentiment appeared to be building in favor of a government of technocrats headed by Monti.

The elegant, gray-haired Monti, 68, made his reputation as a strong-willed economist when as EU competition commissioner he blocked General Electric's takeover of Honeywell. He currently heads Milan's prestigious Bocconi University.

Napolitano, who is charged with tapping a candidate to form a new government, will want to ensure the new administration enjoys broad support in parliament so it can not only get reforms passed but also implemented.

Berlusconi's party remained split on whether to support Monti although some key elements have signaled support.

Foreign Minister Franco Frattini said early elections would not help the country solve its economic problems — a clear message to a group within in Berlusconi's party that is pressing for a vote.

"It would be prudent not to rush to the ballots, plunging the country into a three-month electoral campaign as spreads fly and our debt rises," Frattini said.

The allied Northern League, Berlusconi's key coalition partner, were staunchly opposed, while the main opposition parties appeared willing to accept Monti and a technocratic government despite some reservations from hard-line elements of the left.

Despite the lack of clarity over Italy's political future, the government easily sold 5 billion euros ($6.8 billion) in 12-month bonds at an interest rate of 6.087 percent. Though that's up sharply from 3.57 percent in the last such auction last month, it was well below analyst expectations of 7 percent. Demand for the bonds was also strong, almost twice the amount on sale.

The European Central Bank has been buying up Italian and Spanish bonds in the secondary markets to help keep borrowing rates from becoming unsustainable. There's speculation that the ECB was back in the markets Thursday trying to get Italy's borrowing rates down. The ECB did not comment.

Whatever the composition of the next government, there are no quick easy fixes to Italy's debt problems.

In Brussels, the European Union emphasized that Italy is unlikely to fulfill its promise of balancing its budget by 2013 if recently promised austerity and reform measures aren't implemented.

According to the EU's latest forecast, which does not take into account the most recently promised reforms, Italy will still run a deficit of 1.2 percent of national income, with debt close to 119 percent of economic output.

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The prospect of an Italian government led by leading economist Mario Monti helped calm market jitters Thursday that the country was heading for a Greek-style economic crisis that would threaten the very existence of the euro currency itself.With a groundswell of Italian...
Thursday, 10 November 2011 11:59 AM
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