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Monti Rushes to Fashion Italian Government as Markets Offer Little Relief

Former European Union Competition Commissioner Mario Monti is rushing to form a new government in a bid to restore confidence in Italy’s finances as markets offered little relief to the premier-in-waiting.

Italian bonds and stocks erased early gains and declined as Monti met with leaders of the country’s political parties to discuss Cabinet nominees. Italian bonds fell for the first time in three days, pushing the 10-year yield up 25 basis points to 6.70 percent. The difference in yield between 10-year Italian and German bunds gained 36 basis points to 492 basis points, while the benchmark FTSE MIB index closed down 1.99 percent.

“Uncertainty remains over Monti’s team, the program and the majority, especially in terms of the conditions that will be requested to assure a stable majority in parliament,” said Gianluca Ziglio, a London-based interest-rate strategist at UBS AG. “The market now expects stability and the restoring of public finances to begin with.”

Europe’s inability to contain a regional debt crisis that started in Greece more than two years ago led to a surge in Italian bond yields as investors bet on which nation may need aid next. Monti, an economist and former adviser to Goldman Sachs Group Inc., will try to reassure investors that Italy can cut a 1.9 trillion-euro ($2.6 trillion) debt load and spur economic growth that has lagged behind the euro-region average for more than a decade.

New Cabinet

Monti, 68, will wrap up the consultations tomorrow, when he could announce his new cabinet should he decide to accept the post. Speaking after today’s round of consultations, Monti said the talks are proceeding with “great seriousness” and that all parties are aware of their responsibility. He also said it’s his “desire” to have politicians in his Cabinet and he hopes his government will last until spring 2013.

Monti already faces resistance, with some parties opposing him naming politicians to his government and others setting limits on how far their support would go. A government without any political insiders may find it harder to muster support in parliament to pass unpopular legislation.

Skipping Talks

The Northern League, a key member of the outgoing government, skipped the consultations today. The League had already announced it won’t support any government led by Monti.

Should Monti go ahead and announce a new team, he would then face confidence votes in both houses of parliament to confirm the new government. Those votes could be completed before Nov. 18, Chamber of Deputies Speaker Gianfranco Fini said today.

Monti experienced his first market test today when the Treasury sold 3 billion euros of five-year bonds, the top target for the auction, at the highest yield since 1997. Italy paid 6.29 percent, up from 5.32 percent at the last sale on Oct. 13.

President Giorgio Napolitano offered Monti the post last night in Rome, less than 24 hours after Prime Minister Silvio Berlusconi resigned. Berlusconi’s government unraveled after defections ended his parliamentary majority and the country’s 10-year bond yield surged over the 7 percent threshold that prompted Greece, Ireland and Portugal to seek EU bailouts.

‘Drastic Reforms’

“‘Monti will have to prove that he’s capable of implementing some pretty drastic reforms to bring Italy’s budget deficit and enormous debt under control,” Harvard University professor Niall Ferguson said on Bloomberg Television’s “InsideTrack” with Erik Schatzker. “He’s not exactly an experienced politician and in the end you have to be able to whip those politicians into shape to get tough decisions taken on taxation and expenditures.”

European Commission President Jose Barroso said he’s certain that Monti will be able to successfully deal with Italy’s economic difficulties, according to the text of a message released by the Italian Senate.

Italy has a tradition of reaching outside parliament for leaders to run technical governments at times of political crisis. Monti, who did graduate work in economics at Yale University, spent almost a decade in Brussels as EU commissioner and has been running the Bocconi University in Milan, the country’s top business school, since 1994.

Democracy ‘on Hold’

“The democratic process is being put on hold, but Italians feel this is the right thing to do,” Giuseppe Ragusa, an economics professor at Rome’s LUISS Guido Carli University, said in an interview with Bloomberg Television’s David Tweed in Rome today. “More than austerity reform, he should place the debate on redesigning the labor market because with that comes redesigning the Italian productive system.”

Berlusconi is the fourth leader of a southern EU country to be brought down by fallout from the debt crisis, with new administrations pledging to impose austerity measures demanded by the union and the International Monetary Fund.

Greek Prime Minister George Papandreou resigned last week to make way for a coalition led by former European Central Bank Vice President Lucas Papademos. Spanish Prime MinisterJose Luis Rodriguez Zapatero decided not to seek reelection and polls show Mariano Rajoy, leader of the conservative People’s Party, will win an absolute majority in the Nov. 20 vote. Portuguese Prime Minister Jose Socrates resigned in March after parliament rejected his government’s deficit-cutting plan.

Debt, Growth

Monti said last night he will focus on improving public finances and boosting economic growth. Berlusconi’s People of Liberty party has said it will back Monti’s government, though it doesn’t want him to go beyond implementing the austerity measures already drawn up to balance the budget in 2013.

The EU has been stepping up pressure on Italy to hasten implementation of the measures, which include raising the retirement age, opening up closed professions and the sale of real-estate assets. The EU also wants additional action to spur growth and trim debt. EU and ECB inspectors arrived in Italy last week to review progress and Berlusconi also agreed to let the IMF monitor implementation.

To contact the reporters on this story: Andrew Davis in Rome at abdavis@bloomberg.net abdavis@bloomberg.net; 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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