Italian Prime Minister Silvio Berlusconi’s austerity plan won final approval by Parliament, opening the way for measures intended to balance the budget by 2014 and keep the region’s debt crisis at bay.
The Chamber of Deputies voted 314 to 280 in Rome to pass the package of spending cuts and tax increases. Berlusconi had staked his government’s future on the plan, surviving confidence votes on the measures in the Chamber earlier today and the upper house Senate yesterday.
“I’ve worked in the interest of Italians,” the premier said in the Chamber. “I’d love to be able to give them what I promised, a lowering of taxes, but it’s a difficult moment and now it’s just not possible.”
Berlusconi pushed for quick passage of the bill after investors began dumping Italian securities on concern that Italy, with the region’s second-highest debt, would become the next victim of Europe’s sovereign crisis. The selloff pushed the 10-year bond yield to a 14-year high 6.02 percent on July 12 and sent the benchmark stock index to the lowest since July 2009.
The yield premium that investors demand to hold Italian debt over German bunds rose 17 basis points today to 306 and the 10-year yield gained 12 basis points to 5.76 percent.
Like the Titanic
Finance Minister Giulio Tremonti said yesterday that Italy, and even the region’s strongest economies, would remain vulnerable until European policy makers come up with a solution for the debt crisis that led Greece, Portugal and Ireland to seek bailouts. “Like with the Titanic, even the first-class passengers can’t be saved,” Tremonti told the Senate.
Berlusconi resorted to confidence votes to pass the package to end debate and force allies to back the measure or risk the government’s collapse. His popularity has fallen to a record low amid corruption allegations and sex scandals that prompted dozens of his deputies to abandon his government last year, eroding his majority in the legislature.
“We are radically against your economic policies, your policies in Europe, and this austerity plan,” Pier Luigi Bersani, head of the main opposition Democratic Party, said in the Chamber today. “Our bond spreads are widening again today, showing that this plan won’t shield us from the crisis.”
The plan extends a freeze on civil-servant wages, cuts funding for regional governments and ministries, speeds a planned increase in the retirement age and will make Italians pay 25 euros for some non-emergency hospital visits and 10 euros above existing fees to see specialists. Taxes will be raised on trading accounts holding more than 50,000 euros in securities and on bonus and stock options.
The package aims to eliminate the deficit by 2014, and the bulk of its 40 billion euros ($56 billion) in spending cuts, savings and revenue measures will be implemented in 2013 and 2014. During that period, Italy will still accumulate 120 billion euros in debt, Senate Finance Committee President Mario Baldassarri said.
Italy’s debt is forecast to rise to 120 percent of gross domestic product next year before declining. “I don’t care about the debt-to-GDP ratio,” Baldassarri said in an interview on Bloomberg Television in Rome today. “What goes on in the market and must be underwritten by markets is not the debt-to-GDP, but the billions of euros of actual debt.”
The surge in Italy’s bond yields is already boosting the cost of financing its deficit. Italy priced 1.25 billion euros of five-year bonds at an auction yesterday to yield 4.93 percent, the highest in three years and up from 3.9 percent at the previous sale on June 14.
The budget plan also includes a so-called guarantee clause concerning the overhaul of the tax system. The clause authorizes the government to reduce tax breaks and deductions by as much as 22.6 billion euros if Parliament fails to authorize the tax changes by 2012, Fabio Fois, an economist at Barclays Capital in London, said in a note.
Warnings from Moody’s Investors Service and Standard & Poor’s that they were reviewing Italy’s rating for a possible downgrade, coupled with opposition within the government to the budget plan designed by Tremonti, helped drive yields higher this month.
The backlash against Tremonti over the budget cuts and the fallout from a corruption investigation into one his closest aides had prompted speculation that the minister, the enforcer of the fiscal rigor that kept the deficit in check, would resign. Tremonti, in an interview with the Wall Street Journal today, said he wasn’t stepping down and had no reason to do so.