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Italy’s Monti Signals Euro Crisis Abating as Yields Drop

Monti Expects Firewall Deal This Month
Mario Monti, Italy's prime minister, paues during a television interview inside the Chigi palace in Rome, on Feb. 29, 2012. Photographer: Alessia Pierdomenico/Bloomberg

Italian Prime Minister Mario Monti, signaling the worst may be over for the euro region’s most distressed bonds, said he expects leaders to strike a deal by the end of the month on expanding a debt-crisis firewall.

While German Chancellor Angela Merkel has expressed reluctance to discuss increasing the size of Europe’s bailout kitty at a European Union summit in Brussels beginning today, Monti said he’s “confident” a deal will come.

“Size matters,” said Monti in an interview yesterday at the prime minister’s 16th-century residence in central Rome. “If the approach to firewalls is constructive enough in Europe, I believe we will all be in a better position to face any further contagion effect or any resurgence of the crisis.”

Monti is heading to a meeting of euro-area finance chiefs before the leaders’ summit as 1 trillion euros ($1.3 trillion) of emergency cash from the European Central Bank helps push the yield on Italy’s 10-year bonds -- and their risk premium to German securities -- to the lowest in six months.

“I don’t think it is likely” that spreads will widen again, Monti, 68, said in the interview, sitting in an ante-room of the Chigi Palace adorned by two 17th-century globes, a chandelier and gold-colored wallpaper. “The unpredictability of spreads is not negligible. But we see now in the case of Italy a steady, although gradual decline in the last several weeks. I don’t see honestly any reasons why this course should change.”

Bonds Gain

The yield on Italy’s 10-year bond fell 10 basis points today to 5.09 percent, reducing the difference with similar maturity German debt to 325 basis points, down from a euro-era record of 576 basis points on Nov. 9, a week before Monti was sworn in. Italy’s two-year bond yield fell 24 basis points to 1.9 percent, the first time it dipped below 2 percent since October 2010.

Monti’s comments on the Italian spread are “brave words, although in the short term it would not be a shock if yields fell below 5 percent,” Gary Jenkins, director of London-based independent credit firm Swordfish Research, wrote in a note to investors today.

Asked about Germany’s issues with increasing the firewall, Monti said: “They didn’t say they don’t want to discuss this in March; they prefer not to discuss this on the 1st of March. March has, luckily enough, 31 days.”

Expanding Firewalls

Luxembourg Prime Minister Jean-Claude Juncker, who is chairing today’s euro finance ministers gathering, urged governments to expand the crisis firewall as soon as possible or risk losing momentum in the markets.

“It would not be the first time we would be a little bit too late,” he told reporters after an appearance at a European Parliament committee meeting yesterday.

Merkel’s government believes it’s the wrong time for a review of the ceiling of the 500 billion-euro European Stability Mechanism, the permanent bailout fund coming online this year, a German official told reporters in Berlin yesterday, speaking on the condition of anonymity. The official said narrowing bond spreads are reducing the urgency for a decision.

Europe’s debt crisis has eased since the ECB started pumping unlimited amounts of three-year cash into banks in December. In the second operation, completed yesterday, 800 financial institutions flocked to the ECB to receive 529.5 billion euros in funds. Italian banks borrowed a net 139 billion euros, according to a person familiar with the matter.

Greek Default

Monti, who completed his first 100 days in office last week, also warned against complacency surrounding a potential Greek default after a series of recent summits as both Italian finance minister and prime minister.

“There have been many moments when I thought this would be a possibility,” Monti said.

The risk of a Greek default loomed last month as the country struggled to put together new austerity measures demanded by European leaders for a second bailout. German Finance Minister Wolfgang Schaeuble compounded the angst by saying on Feb. 14 that Europe is better prepared than it was two years ago for a Greek collapse.

“I don’t believe that anybody could be sure of this because it would be a rather unpredictable scenario and sequence of events,” Monti said. “Better not to do the experiment.”

Euro-area finance ministers will probably officially complete the second Greek rescue package today, an official told reporters on condition of anonymity.

‘Brutal Outcome’

If leaders “had not come to an agreement on the second package, this might have brought a brutal outcome for Greece,” said Monti. That would have led to “contagion effects flowing to Spain, Italy, in spite of the good progress being made by these countries.”

Monti, who leads an unelected government of non-politicians, has drawn plaudits from investors since taking charge on Nov. 16 amid the country’s worst financial crisis in two decades.

The former European competition commissioner initially moved to shore up Italy’s finances by overhauling the pension system and adopting 20 billion euros of austerity measures to balance Italy’s budget next year. His government is moving to crack down on tax evasion and overhaul rigid labor laws to spur competitiveness and growth in an economy that expanded at an annual average of 0.4 percent in the decade through 2010.

Fourth Recession

The spending cuts and higher taxes included in the austerity package contributed to pushing the economy into its fourth recession since 2001, and the European Commission predicted last month a 1.3 percent contraction this year. The country’s jobless rate jumped to 9.2 percent in January, the highest in more than a decade, the national statistics institute said today in Rome.

Monti said his government is seeking to “kick start” a cultural change to convince Italians that paying taxes, creating a meritocracy, and promoting competition will sustain growth and help cut the euro region’s second-biggest debt.

“We will not complete a generational change, that is, a change which normally requires a generation, in 12 or 15 months,” said Monti, whose official residence teems with coat-tailed attendants in bow ties. “But it’s important to kick-start it.”

The premier said that even though the overhaul of Italy will take years, he didn’t expect to be asked to seek a second term after the next elections, due in spring next year.

“If I do with my colleagues in government our job very well, I don’t think it is very likely that I will be asked,” he said.

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