Italy’s Stalemate Imperils Crisis Resolution, Finland Says

Italy’s political gridlock following its inconclusive elections risks unraveling years of crisis management, Finnish Prime Minister Jyrki Katainen said.

Failure to commit to responsible fiscal policies could reignite market turmoil and result in losses that would be “too terrible,” Katainen said in an interview in Helsinki yesterday. “I don’t even want to consider that.”

Italian bond yields surged after elections this week delivered a four-way parliamentary split. Pier Luigi Bersani, the top vote getter, has resisted any collaboration with former Premier Silvio Berlusconi and said he would seek to hammer out a compromise with lawmakers elected under the upstart political movement of ex-comic Beppe Grillo.

Bersani, in an interview with la Repubblica today, said he plans a program of reforms to attract votes from all political parties after he ruled out an alliance with Berlusconi.

“Austerity alone leads to disaster,” Bersani told the newspaper, adding that Europe should relax fiscal policies and focus on jobs. “The debt and deficit consolidation is something that needs to be pushed back to the medium term.”

The euro fell as much as 0.5 percent against the dollar to $1.2986, its lowest since Dec. 11. It traded 0.4 percent lower at 1.3005 per dollar as of 2:08 p.m. in London.

Katainen urged Italian politicians not to ignore the nation’s economic hurdles.

Extensive Challenges

“In the Italian economy, the challenges are very extensive,” Katainen said. “It’s not possible to close your eyes and forget about them. They need structural reforms, competitiveness reforms, budgetary balancing. They’re hard resolutions, but unavoidable.”

The stalemate has added to investor concerns the debt crisis may resurface. That would disrupt the progress made in the second part of last year, after European Central Bank President Mario Draghi in July pledged to do “whatever it takes” to protect the euro.

When he was still Finland’s finance minister, Katainen participated in Europe’s crisis management that followed the 2008 collapse of Lehman Brothers Holdings Inc. Since 2011, Katainen has headed the six-party coalition government in the northernmost euro nation, which gets about a third of its output from exports.

Continuing “responsible fiscal policies” is “primarily a question of Italians’ well-being,” Katainen said. “It also has a huge impact on the European economy. Countries that have done a lot to fix their economies, like Spain, Portugal and Ireland, they deserve to see those actions count and not be shaken by actions of other countries.”

Debt Load

Italy’s economy, saddled with $2.6 trillion in debt, has contracted for 18 months. Its borrowing costs rose to the highest in four months at an auction of a new 10-year bond on Feb. 27, even as demand increased from investors attracted by higher returns. Gross domestic product in the euro area’s third-largest economy will shrink through the third quarter, according to the median of 16 economist estimates compiled by Bloomberg.

“The faster they’re able to form a government that’s able to proceed with reforms, the better,” Finnish Finance Minister Jutta Urpilainen told reporters. “Italy’s stability has an impact on the whole euro area.”

Moody’s Investors Service said in a report this week that gridlock risks re-igniting the euro area’s debt crisis as turmoil in Italy risks spilling over into weaker sovereigns like Portugal and Spain.

AAA Rated

Finland, a AAA rated advocate of prudent fiscal policy, yesterday reiterated further spending cuts are needed to protect its top credit grade and end the nation’s debt growth by 2015. The targeted cuts will be agreed on March 21, the government said.

Finnish politicians have berated their euro-area counterparts for breaking jointly-agreed rules, amassing unsustainable debts and endangering the stability of the single currency. Finland kept its budget deficit within the bloc’s 3 percent of GDP rule even as its output contracted 8.5 percent in 2009.

It’s the only euro-area country that still boasts a stable AAA credit grade at the three major rating companies. Germany’s debt grade has a negative outlook at Moody’s Investors Service.

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