Berlusconi Cites Debt Crisis in Fight to Survive: Euro Credit

Italian Prime Minister Silvio Berlusconi
Italian Prime Minister Silvio Berlusconi. Photographer: Andreas Solaro/AFP/Getty Images

Silvio Berlusconi’s fight for his political life enters its final round today with the Italian premier using the European debt crisis as a shield.

“We could become targets of international speculators like Greece, Ireland and Portugal, a tragic risk with disastrous consequences,” Berlusconi told supporters in Naples on Dec. 5. “The ratings agencies have confirmed our top rating but have said that it’s conditional on maintaining political stability.”

Lawmakers in Rome began debating a no-confidence motion today and the voting, scheduled for tomorrow, will determine whether Italy’s richest man can sustain his government, whose term has two years left. The yield premium on Italy’s 10-year debt over comparable German bunds more than doubled this year, reaching a euro-era high of 212 basis points Nov. 30. It was at 157 basis points today as of 9:45 a.m. in Rome.

Berlusconi, addressing the Senate today, said he’ll seek to enlarge his majority in parliament by forming a new government supported by “all moderates,” if he wins the confidence votes. He called for a “pact” that includes “renewing the program and the composition of the government.”

A loss for Berlusconi may lead to early elections or wrangling to form a new coalition. Prolonged political unrest threatens to shift investor focus to Italy, which has so far weathered the market decline better than Spain, Portugal and Ireland, maintaining the lowest risk premium of the four. Standard & Poor’s, in reaffirming Italy’s A+ credit rating on Nov. 2, said political instability was one of the biggest risks to the country’s creditworthiness.

Unclear Future

“The biggest risk from an investors’ point of view is that we jump into new elections and we get an unclear outcome in terms of a solid, working majority,” said Vladimir Pillonca, an economist at Societe Generale SA in London.

Under Italian law, elections aren’t automatic. If Berlusconi, 74, wins, he’ll have a shaky parliamentary majority after the defection in July of a key political ally, Gianfranco Fini, which led to the leadership challenge. If he loses, President Giorgio Napolitano will have to consult all parties to form a government, including a new one led by the incumbent.

With debt of more than 1.75 trillion euros ($2.3 trillion), Europe’s biggest in nominal terms, any credit-rating downgrade or widening of bond spreads has a bigger effect on Italy than on other so-called peripheral nations.

A 100 basis-point jump in funding costs in the next two years would add 0.4 percentage point of gross domestic product to the budget deficit in 2011 and 2012, Pillonca estimated in a Dec. 9 report. That’s almost twice the impact on Spain’s deficit, he wrote. Italy needs to sell more than 220 billion euros of bonds next year, the most in the euro region.

Fini’s Break

The cost of insuring Italian debt against default rose almost 70 basis points to 204 since Fini, speaker of the lower house of parliament and co-founder of Berlusconi’s ruling People of Liberty Party, broke with the premier five months ago and began campaigning for his ouster. Fini has the backing of at least 35 members of Parliament’s lower house, enough to deny Berlusconi a majority.

Tensions between the two deepened after Berlusconi admitted to phoning police to check on a 17-year-old nightclub dancer who was arrested for theft. The girl, who had attended parties at his Milan mansion, was released into the custody of his former dental hygienist and now a local politician from his party.

As the vote approached, some lawmakers have abandoned the effort to end Berlusconi’s 16-year political career and promised to back the premier.

Call for Investigation

The decisions have prompted Pier Luigi Bersani, head of the Democratic Party, and Antonio di Pietro, leader of the Italian Values Party, to call for prosecutors to investigate vote buying. Berlusconi denies the allegations and predicts he will carry the confidence vote.

“A week ago, just computing the votes, a fall of the government was given as probable,” said Matteo Regesta, a fixed-income strategist at BNP Paribas SA in London. “It isn’t the case today.”

Prior to Berlusconi’s entry into politics in 1994, Italy had averaged more than a government a year since World War II and investors had shown tolerance with the shifting political winds. Since the start of the euro in 1999 until the beginning of this year, Italy’s risk premium over Germany averaged 35 basis points, less than a quarter of the current level.

Extraordinary Times

“We are living in extraordinary times in which past history is not very useful,” Regesta said. “In the past, coalitions with opposing strategies would have had little impact on such a huge and liquid market like Italy’s. Given the current stress in euro-government capital markets and given also the closer attention players are giving to balance sheets, to budgets, to fiscal projections,” that may no longer be the case, he said.

One reason Berlusconi’s political woes haven’t had more effect is that all parties agreed to pass the 2011 budget before the confidence vote. The spending plan, which didn’t need the kind of wage cuts and tax increases implemented in Spain, Portugal, Ireland and Greece, aims to bring the deficit down to 3.9 percent of GDP next year from 5 percent this year. That compares with 6.4 percent for Spain in 2011, 4.9 percent for Portugal and 10.3 percent for Ireland.

Italy’s finances got a vote of confidence on Dec. 10, when European Economic and Monetary Affairs Commissioner Olli Rehn told lawmakers in Rome that the EU didn’t expect Italy would need additional budget-cutting measures in 2011, though the EU would be “rigorously monitoring” the country’s finances.


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