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Italy Key to Euro-Zone Crisis, Barclays’s Callow Says: Tom Keene

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Oct. 26 (Bloomberg) -- Italy’s ability to implement fiscal austerity and reduce its debt burden is crucial to euro-zone policy makers’ efforts to end the region’s debt crisis, according to Julian Callow, chief European economist at Barclays Plc in London.

“If Italy is in difficulties and is in need of financing from the rest of the euro area, the rest of the euro area can’t really stump up enough capital to support that,” said Callow in a radio interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “Italy is the key thing to address because of its size and because of these unstable debt dynamics, with interest payments that have started to emerge.”

Italy’s borrowing costs jumped today when its Treasury sold 10.5 billion euros ($14.6 billion) of bills and bonds, with the shorter-term securities priced to yield the most in three years. The country has to repay 298 billion euros of debt next year, more than France, Spain or any other euro member.

Italian Prime Minister Silvio Berlusconi, struggling to convince investors he can reduce Italy’s 1.9 trillion-euro debt, agreed last night to resign by January in exchange for changes on pensions, liberalization and bureaucracy, newspaper Repubblica reported.

European Union talks with banks on bondholder losses as part of a second Greek rescue package are deadlocked and have been suspended, an EU official said. EU leaders meet in Brussels today for the second summit in four days to try to reach an agreement to bolster the region’s rescue fund, strengthen banks and relieve Greece to avoid the contagion spreading.

“Italy doesn’t have so much heavy lifting to do in terms of fiscal adjustment, but it’s proving hard to do that because of the politics,” Callow said. “The markets don’t have confidence and hence there is a lot of pressure there on the Italian government.”

Italy was downgraded by the three credit rating companies during the past month, starting with Standard & Poor’s on Sept. 19, on concern Berlusconi would struggle to reduce debt amid weak growth and potential political instability.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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