Italy Budget Adds Political Risk to Debt Woes for Berlusconi: Euro Credit
Italy’s passage of a 2011 budget plan paves the way for a confidence vote that will decide Prime Minister Silvio Berlusconi’s political fate and complicate passage of more deficit cuts called for by the European Union.
The premium investors demand to hold Italian 10-year debt over German bunds reached a euro-era high of 212 basis points on Nov. 30, a day after Ireland requested European-Union emergency aid and EU Monetary Affairs Commissioner Olli Rehn said Italy may need additional budget cuts to pare its shortfall. The spread narrowed today to 154 basis points, compared with an average level of 103 basis points in 2009.
“It’s a problem if Italy really does become ungovernable, or if Berlusconi is clinging on for dear life,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London.
The Dec. 14 confidence vote threatens to fuel political instability in Italy at a time investors are punishing euro- region governments for not making good on their deficit-cutting commitments. Ireland yesterday passed an initial series of budget measures as part of a spending plan that includes 6 billion euros ($8 billion) in cuts and tax increases. The votes came after the government was forced to accept a bailout that opposition parties have said they may seek to renegotiate after early elections next year.
The European Commission estimated on Nov. 29 that Italy’s budget deficit will be 4.3 percent of gross domestic product next year, worse than the government’s 3.9 percent forecast. The difference is the equivalent of about 6 billion euros. Rehn said during the presentation of the commission’s outlook that it was “essential that Italy sticks to its fiscal targets,” which may require additional austerity measures.
Italy, which has the euro region’s second-largest debt, has fared better than the other so-called peripheral countries since Greece’s near-default in May led to a jump in borrowing costs for the region’s high-deficit nations. Unlike in Spain and Ireland, Italy’s economic growth wasn’t fueled by a housing and borrowing boom, and its banks remain relatively healthy. The government also avoided the stimulus spending that inflated deficits in other European countries.
Italy is set to end the year with a deficit of 5 percent, less than the 9.6 percent of Greece, 9.3 percent for Spain, 7.7 percent for France and 32.3 percent in Ireland, for which many economists credit Italian Finance Minister Giulio Tremonti.
“If Berlusconi wins the confidence vote, it means that Tremonti will still be there and that will be seen as good news,” said Lavinia Santovetti, an economist at Nomura International in London. “Somehow Tremonti has managed to keep public finances under control.”
Break With Fini
Berlusconi, 74, is facing the confidence votes after Gianfranco Fini, the co-founder of his ruling People of Liberty party, broke with the premier in July and began campaigning for his ouster. Fini may have enough votes to bring down the government, though under Italian law, it’s not clear what would happen next. President Giorgio Napolitano would first consult with all the political parties to see if anyone, including Berlusconi, could cobble together a parliamentary majority. If not, Italy will hold elections in the coming months, threatening to end Berlusconi’s term two years early.
“Our main concern is that the complex political situation will lead to a stalemate of the government functions leading to a failure to engineer policies aimed to boost productivity and increase the competitiveness of the domestic market,” Deutsche Bank AG economist Marco Stringa said in a Dec. 3 report.
If the prime minister managed to return to power, he would struggle to maintain a parliamentary majority without Fini’s support. Elections would likely produce a loose coalition of parties with little in common except their opposition to the premier, or another Berlusconi victory with a narrower majority in the legislature.
“My fear in a way is that if Berlusconi loses the confidence vote, there will be huge uncertainty over what will happen next,” Santovetti said. “The situation is still evolving, but there is no clear cut sign of who is going to win or who is going to do what.”
With debt in nominal terms of 1.8 trillion euros, more than that of Spain, Portugal, Ireland and Greece combined, any increase in Italy’s risk premium will have an immediate effect on the country’s borrowing cost. Italy needs to sell almost 200 billion euros in bonds next year, analysts at Citigroup Inc. estimated in a Nov. 25 report, and the Treasury typically holds four to five debt auctions every month.
The low level of private debt and the lower percentage of Italian bonds owned by foreign investors have helped limit the impact of contagion on Italy and make a debt of 116 percent of GDP more manageable, according to Stringa at Deutsche Bank. In Italy, household debt is the equivalent of 47 percent of GDP, less than half the level of Spain and Portugal. Still, for Italy to move out of the periphery and close the gap with more economically competitive countries such as Germany requires the kind of strong political leadership the nation may lack, Stringa said.
“The probable consequence of the further political deterioration in Italy will be a continuing slow growth even by European standards,” he said.
The government forecasts growth of 1.3 percent next year and 2 percent in 2012, predictions that may prove “too optimistic,” Stringa said.
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