Italy’s Senate rushed to pass debt-reduction measures that clear the way for establishing a new government that may be led by former European Union Competition Commissioner Mario Monti in a bid to restore confidence in Europe’s second-biggest debtor.
The Senate is set to vote tomorrow on a package of measures including asset sales and an increase in the retirement age. The Chamber of Deputies may vote the following day, and Prime Minister Silvio Berlusconi will resign “immediately,” Angelino Alfano, the secretary of Berlusconi’s People of Liberty party, said on state-owned Rai television last night.
President Giorgio Napolitano named Monti yesterday as a Senator for Life, an honorary position that allows him to vote in the upper house of parliament. Alfano, when asked if Monti would lead the government, said Berlusconi had backed his Senate appointment and had first named Monti as an EU commissioner in 1994. Monti may be nominated as soon as Nov. 13, newspaper Il Sole 24 Ore reported. Former Prime Minister Giuliano Amato may also be in the government, Sole said, citing no one.
“A technocrat government, most likely headed by Mario Monti (although Giuliano Amato is another likely candidate), is in our view the best and at this stage probably the only possible credible outcome,” Nomura International economist Lavinia Santovetti wrote in a note to investors yesterday.
Italy’s 10-year bond yield yesterday crossed the 7 percent threshold that prompted Greece, Portugal and Ireland to seek bailouts after Berlusconi’s parliamentary majority unraveled and LCH Clearnet SA said it would demand additional collateral on Italian debt. German Finance Minister Wolfgang Schaeuble told lawmakers yesterday Italy may need to consider a request for European Union aid, two people present at the meeting said.
“A prolonged period of 10-year bond yields in excess of 7 percent alongside a faltering economy is a dangerous mix, and could send Italy’s debt dynamics lurching toward an unsustainable and ultimately insolvent position,” Raj Badiani, senior economist at HIS Global Insight wrote in a note to investors. Still, “Italy remains solvent” and “can survive several quarters of expensive debt auctions.”
Italy’s Treasury sold 5 billion euros ($6.8 billion) of 1-year Treasury bills at an auction today to yield 6.087 percent, the highest rate in 14 years and up from 3.57 percent at the last sale on Oct. 11. The yield on Italy’s benchmark 10-year bond fell 19 basis points to 7.05 percent at 12:01 p.m. Rome time, after reaching 7.37 percent yesterday, the highest level since the introduction of the euro in 1999.
Mediaset SpA, Berlusconi’s media company, gained 4.7 percent to 2.31 euros after yesterday’s 12 percent plunge, its worst decline in more than two months.
The budget measures presented last night were first pledged to European Union allies at a summit on Oct. 26 and are aimed at convincing investors Italy can overhaul its economy to reduce borrowing. Months of squabbling within Berlusconi’s Cabinet over the plans helped fuel the government’s collapse and the selloff of the country’s debt. Berlusconi, after failing to muster a majority in a routine vote on Nov. 8, told President Giorgio Napolitano he will resign as soon as the measures were passed.
Once Berlusconi resigns, Napolitano will begin consultation with political parties to see if they can agree to form a new government. Napolitano did a round of consultations with political parties earlier this month as the crisis deepened, an exercise which may help speed an agreement.
Napolitano may ask European Central Bank Executive Board member Lorenzo Bini Smaghi or Bank of Italy Director General Fabrizio Saccomanni to join the new government, la Repubblica reported today, without saying where it got the information.
Monti’s Senate appointment was “in anticipation of giving him the task of forming a new government, probably on Monday morning -- this should stabilize the market,” Marino Valensise, chief investment officer at Baring Asset Management Ltd., which manages about $53 billion, said in a Bloomberg Television interview. “The problem is access to financial markets -- rolling over debt,” rather than solvency, he said.
Italy’s next market test will come on Nov. 14 when the Treasury will seek to sell as much as 3 billion euros of five-year bonds. The country is set to spend 77 billion euros this year in financing its debt and faces about 200 billion euros of bonds maturing in 2012.
U.S. President Barack Obama drew a distinction between Italy’s situation and that of Greece, news agency Ansa reported, citing an interview at the White House. “Italy isn’t Greece, it’s a large country and a rich country,” Obama said, according to Ansa. “Athens’ problem is really one of solvency,” while Italy’s “is more one of liquidity,” Obama said, Ansa said.
The political turmoil in Italy coupled with Greece’s inability to name a new prime minister, contributed to declines in the euro and a slump in stocks. The single currency slid to a one-month low of $1.3487 earlier today before rising to $1.3572 at 11:55 a.m. Rome time.
The measures presented to the Senate last night include a pledge to raise 15 billion euros ($20 billion) from real-estate sales over the next three years, a two-year increase in the retirement age to 67 by 2026, opening up closed professions within 12 months and the gradual reduction in government ownership of local services.
The EU and the ECB had pressured Italy to adopt the measures to try to spur growth and cut a debt of 1.9 trillion euros, more than Greece, Spain, Ireland and Portugal combined.
Italy failed to deliver some measures pledged to the EU, such as making it easier for companies to fire workers during economic downturns. The bill did include tax incentives to hire apprentice workers, though it won’t seek to modify Article 18 of the labor code, which restricts firing practices.
Italy’s bond yields began to climb in July as Europe’s failure to contain Greece’s debt woes fueled contagion. The country’s deficit of 4.6 percent of gross domestic product last year is similar to Germany’s at 4.3 percent and less than that of the U.K. and France.
The country has a surplus in its primary budget, which excludes debt interest payments, and its debt is barely rising. Still, at almost 120 percent of GDP, second only to Greece, the debt load began to spook investors in a country where economic growth has trailed the EU average for more than a decade.
The government in August announced a 45.5 billion-euro package of austerity measures to balance the budget in 2013. The plan helped convince the ECB to backstop Italian debt. The ECB has spent more than 100 billion euros since beginning its purchases of Italian and Spanish bonds on Aug. 8, an effort that has failed to stem the rise in yields.
The European Commission forecast today that Italy will miss its balanced budget goal, saying the deficit will be 1.2 percent of GDP in 2013. The EU also estimated that the country’s economic expansion will slow to 0.5 percent this year and 0.1 percent next from 1.5 percent in 2010. It projected debt to peak at 120.5 percent of GDP in 2012 before declining in 2013.
Italian industrial output plunged in September amid the sovereign-debt woes, Rome-based national statistics office Istat said today. Production declined 4.8 percent from August, when it rose a revised 3.9 percent.