Monti Bonds Gain as Merkel, Sarkozy Busy at Home: Euro Credit

Italy's Prime Minister Mario Monti
Prime Minister Mario Monti is emerging as a game-changer in Europe’s debt crisis as German Chancellor Angela Merkel tackles a domestic political crisis and French President Nicolas Sarkozy focuses on his re-election bid. Photographer: Jock Fistick/Bloomberg

Italian Prime Minister Mario Monti is emerging as a game-changer in Europe’s debt crisis as German Chancellor Angela Merkel tackles a domestic political crisis and French President Nicolas Sarkozy focuses on his re-election bid.

Monti, who has repeatedly criticized Germany and France for first violating European fiscal rules, was scheduled to meet alone in Rome today with Merkel, chief powerbroker in the debt crisis and head of Europe’s largest economy. The meeting, first set for Jan. 20 with Sarkozy, was rescheduled without him and then canceled today as German President Christian Wulff resigned amid the threat of a legal probe into corruption allegations.

“Monti is extremely important because Italy is really the make-or-break country in the euro crisis,” Christian Schulz, an economist at Berenberg Bank in London, said in a telephone interview. Monti has “re-established Italy as an important force in European politics.”

Monti held a three-way telephone conversation today with Merkel and Greek Prime Minister Lucas Papademos and the three leaders expressed confidence that euro-area finance ministers meeting in Brussels Feb. 20 “can reach an agreement on Greece,” Monti’s office said in an e-mailed statement. Greece is seeking approval of a new rescue package to avert the euro area’s first sovereign default.

A former EU competition commissioner who leveled a record fine against Microsoft Corp., Monti took over as premier from Silvio Berlusconi on Nov. 16 after investors lost confidence in Italy’s ability to cut the world’s fourth-biggest debt. Monti embarked on an overhaul of the Italian economy that, along with the European Central Bank’s unlimited three-year loans to banks, has helped send Italian yields plunging from euro-era records.

Falling Yields

Since Monti’s arrival, Italian 10-year yields have declined about 1.4 percentage points to 5.61 percent after hovering for about two months at the 7 percent level that led Greece, Ireland and Portugal to seek rescues. One gauge of the “Monti effect” is the narrowing of the yield difference between Italian and Spanish 10-year bonds, which also benefited from ECB lending. The gap shrank to 35 basis points from 202 at the start of 2012.

Italy would have had to pay an extra 8.1 billion euros in financing costs over the past seven months if its bond yields had remained near the levels of Nov. 30, when the 10-year yield was at 7.02 percent, Riccardo Barbieri, an economist at Mizuho International Plc in London, said in an e-mail. The 10-year now yields 370 basis points more than comparable German bunds, down from 518 on Nov. 16.

White House

Monti’s unelected government of non-politicians has kept a pledge by Berlusconi to erase the budget gap in 2013, pushing through 20 billion euros ($26 billion) in tax increases and spending cuts as well as measures aimed at spurring anemic Italian growth through deregulation and reducing red tape. His efforts won him an invitation to the White House for talks with President Barack Obama last week and a Time magazine cover story headlined, “Can This Man Save Europe?”

“Monti is clearly keen to reassert a degree of authority for Italy within the euro zone, which his disastrous predecessor had tossed away,” Marc Ostwald, a strategist at Monument Securities Ltd. in London, said in an e-mail. Sarkozy is “in no position to do anything other than fight the election, leaving euro-zone governance issues to be dealt with once the election is over, a situation neither Germany nor Italy” can allow.

Today’s Talks

Monti, who is also finance minister, will host talks today in Rome with Canadian Finance Minister James Flaherty. Canada and the U.S. have so far opposed giving the International Monetary Fund more resources to devote to Europe’s debt crisis, an idea supported by European leaders.

A week after taking office, Monti met with Merkel and Sarkozy in Strasbourg, France, where he publicly criticized Germany and France for violating EU budget rules in 2003. He has since pushed Merkel to help nations like Italy and Greece offset the impact of austerity measures and asked the EU to make economic growth a formal priority alongside fiscal virtue.

Monti “has been a game-changer,” restoring “credibility to Italy’s government” at a critical time for Europe, said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. He’s pushing for a “quid pro quo from Germany: more confidence-building measures to shore up the euro in exchange for ambitious reforms at home.”

With Greece veering toward default amid disagreement among creditors over a rescue package, Monti escalated his criticism in remarks to the European Parliament on Feb. 16, saying Athens was being put under unbearable strains. He again pointed to previous German and French violations of EU deficit rules in pushing for more comprehension for Greece.


“The very tough approach being taken toward Greece today may lead us to regard this as being excessive, and it probably is,” Monti said, warning “resentments” fueled by the crisis risked breaking apart the 27-nation EU. “There are no good guys and bad guys. We all need to feel jointly responsible.”

While Merkel has praised Monti for his “remarkable measures,” she was less charitable when asked about enjoining growth and fiscal discipline as a cornerstone of EU policy.

“I’m still looking for what more we should do,” she told reporters in Berlin on Jan. 18. “When I have figured that out, I will tell you what it is.”

Still, Monti’s role in Europe’s crisis debate is growing as Sarkozy digs into his re-election battle while trailing in the polls and Merkel risks being distracted from the crisis by the resignation of Wulff. She said today she’ll work with opposition parties to identify a candidate for the largely ceremonial post.

Monti’s next challenge is to make good on a pledge to overhaul Italy’s rigid labor market by the end of March. His ability to see that through, while ensuing lawmakers don’t dilute his earlier measures on deregulation and red tape, may decide whether his government lasts to the end of the current legislature in spring 2013.

That effort will also help determine whether Italian bond “yields can revert on a permanent basis to lower levels, which will in turn help to achieve the budget surplus that is needed to start bringing down Italian government debt to a sustainable level,” Ostwald said.