Monti Warns Italy Risks Anti-Euro Shift Without Action on Spread

Prime Minister Monti and Prime Minister Rajoy
Italy's Prime Minister Mario Monti, left, speaks with Spain's Prime Minister Mariano Rajo before a working lunch at the Moncloa palace in Madrid. Photographer: Angel Navarrete/Bloomberg

Italy risks a public backlash that could lead to an anti-euro government in the region’s third-biggest economy should European policy makers fail to bring down borrowing costs, said Prime Minister Mario Monti.

Monti made the remarks in Finland during a three-nation tour aimed at challenging his European Union colleagues to back his fight to lower the extra yield investors are imposing on Italian and Spanish government debt. Spain and Italy are now in focus as they suffer contagion from the debt crisis that erupted in Greece almost three years ago.

“If the spread in Italy remains at this level for some time, then you’re going to see a non-EU oriented, non-euro oriented, non-fiscal discipline oriented government in Italy,” Monti said in a speech in Helsinki.

Monti is due in Madrid later today for talks with Prime Minister Mariano Rajoy as he seeks to capitalize on a pledge by European Central Bank chief Mario Draghi to do whatever is takes to save the euro. Investors are looking to see if Draghi will give specifics on how he plans to make good on that commitment when he holds a press conference at 2:30 p.m. in Frankfurt.

The yield on Italy’s 10-year bond fell 11 basis points to 5.8 percent at 10 a.m. in Rome. Even with the decline that rate remains about 1 percentage point higher than at the start of March and 4.4 percentage points more than similar maturity German debt. Spain’s 10-year yield, which surged to a euro-era record 7.5 percent last month, fell 6 basis points to 6.6 percent.

Weidmann Warning

Bundesbank President Jens Weidmann indicated his opposition to aggressive action by the ECB yesterday when he said the central bank shouldn’t exceed its inflation-fighting mandate, according to an interview posted on the German central bank’s website yesterday. He also stressed Germany’s importance in setting common strategy in the 17-nation euro area.

Monti, asked in Helsinki what he wanted the ECB to do, declined to comment, citing the bank’s independence.

“I only wish by the way that all components within the European system of central banks displayed the same degree of respect for the independence of the ECB as heads of governments do,” he told reporters.

With Italian elections due by April, public anger over the fallout from the debt crisis is eroding support for the euro. The Five-Star movement of comedian-turned politician Beppe Grillo would get 20 percent of the vote should elections be held today, a July 13 poll by IPR Marketing showed. That would probably prevent either of the country’s main parties from gaining enough support to form a government on their own. Monti, who leads an unelected government of non-politicians, has said he won’t seek another term.

Frustration Rising

Grillo’s party is the main political force to profit from rising frustration over the tax increases and budget cuts adopted by Monti that have left Italy on track to balance its budget next year while failing to stop the surge in borrowing costs. Grillo, 63, said in a May 10 interview that Italy giving up the euro “can’t be a taboo” and that the currency has become “an ever-tightening noose” around Italy.

Almost three years since the sovereign debt crisis surfaced in Greece, Monti is leading efforts to coax Europe into strengthening its bailout capacity to try to reverse the kind of surging bond yields that led Greece, Ireland and Portugal to seek bailouts. President Barack Obama called Monti July 30 and “reiterated his support for decisive action to resolve the crisis,” according to a White House statement.

No Bailout

Italy won’t need a bailout, though it may want Europe’s rescue funds and the ECB to buy its bonds in a bid to narrow spreads, Monti said yesterday.

“Italy does not seem to be in need of any particular help, certainly not for the rescue of its economy nor for its budgetary needs,” he said in Helsinki yesterday. “Italy may need help perhaps in relation with the slow pace which markets recognize the efforts taken and the results achieved by Italy or other countries for that matter.”

Markets are awaiting the establishment of the 500 billion-euro ($615 billion) ESM, which is on hold pending a decision by Germany’s Federal Constitutional Court, set for Sept. 12. Monti said the permanent rescue fund will eventually gain access to ECB liquidity via a bank license, challenging German policy makers to back more actions to tame the euro-area crisis.

“I think this would help, I think this will in due course occur,” Monti said yesterday at a news conference with Finnish Prime Minister Jyrki Katainen.

North-South Divide

While Monti has found common cause on stepping up efforts to resolve the crisis with Rajoy of Spain and French President Francois Hollande, leaders in Germany and Finland have proven less willing to commit more help.

Merkel and her Cabinet ministers ruled out any move to grant the ESM a banking license, a proposal that would allow the fund to wield unlimited firepower, Economy Minister Philipp Roesler said.

“The chancellor and we have discussed it and we are united that a bank license cannot be our way,” Roesler, who is also vice chancellor, told reporters in Berlin after he stood in for Merkel at the weekly Cabinet meeting. Merkel is on vacation. “Fiscal discipline and economic reforms have to be the way forward,” Roesler said. “Other ways are not suitable.”

Leaders in AAA rated Finland, the northernmost euro member, have been no more accommodating. Finland demanded collateral for Greece’s second bailout last year and has since insisted it will only contribute to Spain’s banking rescue if it gets similar security. Finland also wants rescue funds to come with strict terms such as austerity and burden sharing for bondholders.

“We have been very critical on secondary-market operations by rescue funds as we don’t believe that’s the right way to use money,” Katainen said yesterday. Still, he said the situation in the sovereign bond markets is “not normal,” and “some sort of European solution” was needed.

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