Monti Seeks Support for $40 Billion Austerity Package to Trim Italy Debt
Prime Minister Mario Monti will lobby parliament to support a 30 billion-euro ($40 billion) package of austerity and growth measures to trim the euro-region’s second- biggest debt and prevent Italy from sparking the euro’s breakup.
Monti presents the plan to the Chamber of Deputies in Rome at 4 p.m. and to the Senate at 6 p.m. after his Cabinet approved the package yesterday, a day ahead of schedule. The package, which includes more than 12 billion euros in spending cuts, will force workers to delay retirement, resurrect a tax on first homes, crack down on tax evasion and open up closed professions.
Monti, sworn in on Nov. 16 after Silvio Berlusconi resigned, is under pressure to move quickly as a selloff of the country’s bonds sent borrowing costs surging last month past the 7 percent threshold that led Greece, Ireland and Portugal to seek aid. Italy is seen as too big to bail out with 500 billion euros of bonds maturing in the next three years, more than the current size of the European Union’s rescue fund.
“Monti has decided that there are no other options than to impose very tough measures in order to convince markets that the country is serious about lowering its debt,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an interview. “It is going to be very difficult for Mr. Monti to impress the market with anything, including this package, unless a credible firewall is swiftly erected around Italy and Spain.”
The yield on Italy’s 10-year bond fell 29 basis points to 6.395, the lowest in a month, narrowing the gap with German bonds top 424 basis points. The FTSE MIB index gained the most of Europe’s benchmarks, adding 1.8 percent at 9:30 a.m. Lenders led the advance with Banca Monte Paschi dei Siena SpA adding more than 6 percent as the package included a government guarantee on new sales of bank debt included.
The budget package comes at the start of a critical week for Europe’s efforts to end the debt crisis and prevent Italy and Spain from succumbing and causing a breakup of the single currency. German Chancellor Angela Merkel meets French President Nicolas Sarkozy tomorrow to advance a plan for stricter enforcement of the region’s deficit rules that will be presented to European Leaders at a summit on Dec. 9.
Market tensions eased last week as investors bet that the summit would make progress on unifying budget policy that could leave for more robust support from the European Central Bank or eventual issuance of euro-region bonds.
Italian 10-year bonds rallied for the first week in eight, with the yield falling 58 basis points over the week to 6.68 percent. That narrowed the yield difference over similar- maturity German bunds by 45 basis points to 4.55 percentage points. Even with the decline in yields, Italy is paying the highest rates in more than a decade to attract buyers for its debt and offered more than 7 percent on new bonds for the third time in a week on Nov. 29.
Monti’s Cabinet adopted the measures after a three-hour meeting in Rome and then presented the plan in an emotional two- hour press conference. Labor Minister Elsa Fornero broke into tears as she described the sacrifices the government was asking workers to make and explained that all but the lowest pensions would no longer be indexed to inflation.
The prime minister appealed to Italians to prepare for sacrifices needed to save the country and said that he would forego his salary as prime minister and finance minister.
“We have responded to the necessity of putting the public finances under a strong control so that Italy isn’t the weak point of Europe but a source of strength,” he said. “At the same time we have paid attention to fairness and have done our best to distribute the sacrifices.”
The plan includes 20 billion euros of austerity measures and another 10 billion euros of proposals that aim to boost growth of an economy whose expansion has trailed the European averaged for more than a decade. Gross domestic product will contract 0.4 percent to 0.5 percent in 2012 and be flat the following year, Deputy Economy Minister Vittorio Grill said at the press conference.
“It’s quite ambitious and the measures are at the top end of what was expected, so it should be well Received,” said Luigi Speranza, an economist at BNP Paribas SA in London. “It’s also positive that it’s a decree law so it goes into effect immediately.”
The package, the third austerity plan to be adopted in the past six months, touches on all aspects of Italian society with items aimed at shrinking the size of the government, raising the retirement age, forcing all transactions of more than 1,000 euros to be done electronically to fight tax evasion, an increase of the sales tax of two percentage points, and tax breaks for companies that hire young workers and women.
In the future pensions will be based on contributions to the system rather than the salary at retirement age, Fornero said. The retirement age for women will be raised until it matches the 66-year limit for men in 2018 and early retirement will be penalized and men will need to contribute to the social security system for 42 years for men and 41 years for women before being able to retire.
The measures are “timely and ambitious,” European Commissioner for Economic and Monetary Affairs Olli Rehn said in an e-mailed statement last night. “The low growth potential of the Italian economy cannot be corrected overnight, but the measures announced today will help removing some bottlenecks to growth.”
The government dropped a plan to raise the tax rate on Italy’s highest earners, though it will tax most traded securities and luxury goods such as yachts, aircrafts and high performance cars, and resurrect a property levy on first homes that had been abolished by Berlusconi. Restoring that tax could raise 3.5 billion euros a year, former Finance Minister Giulio Tremonti had estimated.
The measures may be just the first salvo in Monti’s efforts to make the Italian economy more competitive and spur growth. He said last night that they government still plans to overhaul labor market laws, but his government needed more time to prepare the measures, which he hoped to announce “within weeks.”
“It’s a very tough package, but we don’t have any choice except to pass it,” Emma Marcegaglia, head of employers’ lobby Confindustria, said after meeting with Monti yesterday. “The plan is key to saving Italy and preventing the collapse of the euro.”
Italy’s budget deficit of 4.6 percent of gross domestic product last year is less than France and half that of the U.K., and the measures may help the government achieve its goal of balancing the budget in 2013. The country’s debt is larger than Greece, Spain, Portugal and Ireland combined.
Monti spent the weekend meeting with leaders of the main political parties, unions, employers and social groups to try to build support for the plan before it goes to parliament. Monti, an economist and former European Commissioner, was chosen by President Giorgio Napolitano to lead Italy after Berlusconi’s resignation and the professor, as he his known, has no political base in parliament.
The measures the new government plans to take are severe and necessary to “make Italy better,” the leader of Berlusconi’s People of Liberty party, Angelino Alfano, said after the talks on Nov. 3. “Monti has been called in precisely to take decisions which are far from easy, and we are aware of this,” he said.
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