Berlusconi’s Austerity Plan Wins Final Approval in Parliament

Prime Minister Silvio Berlusconi won final parliamentary approval for a 54 billion-euro ($74 billion) austerity package that seeks to balance the budget by 2013 in an attempt to stem Italy’s surging borrowing costs.

The 630-seat lower house approved the plan tonight after backing the government earlier today in a confidence vote called to speed passage of the measure. Police had to use tear gas to disperse demonstrators outside the parliament in Rome as the vote was being carried out.

“The approval of the austerity package sends a signal of stability,” German Economy Minister Philipp Roesler told a news briefing in Rome, before the final vote in Parliament. “I have respect for what Italy has done with its budget adjustment as this will benefit the whole euro area.”

Italy is scrambling to convince investors that it can tame the region’s second-biggest debt burden as borrowing costs surge amid concern that Greece may default. The austerity package, the nation’s second since July, was adopted in exchange for European Central Bank bond purchases that have helped reduce 10-year yields from record highs even as they remain close to 6 percent.

The legislation revised measures in a plan the government approved by decree last month that failed to reassure investors after Berlusconi, bowing to political pressure from allies, watered it down by scrapping moves such as a wealth tax.

Bond Slump

The backslide prompted an 11-day fall in Italian bonds that ended on Sept. 6, when the government beefed up the plan by adding a one-percentage point increase in the value-added tax and a new levy on incomes over 300,000 euros. The 320-seat Senate, where Berlusconi’s government enjoys a wide support, then adopted the package.

The yield on Italy’s 10-year bond fell to 12 basis points today to 5.59 percent, pushing the premium investors demand to hold the securities instead of benchmark German bunds to 372 basis points. Yesterday, the spread ended at 392 basis points, its highest close since before the start of the euro.

While the plan’s passage is “very welcome step,” the slowing global economy casts doubt on Italy’s ability “to meet its fiscal targets and will also render additional corrective measures very likely,” Silvio Peruzzo, an economist at Royal Bank of Scotland Plc in London, said by e-mail. Even with ECB backing, Italy’s debt remains “under pressure, which is indicative of a well-rooted lack of confidence in Italy and in the European policies to tackle the crisis.”

Euro Bonds

European Commission President Jose Barroso, speaking to the European Parliament in Strasbourg, France, today, said he is close to proposing options on joint euro-area bond sales, putting officials in Brussels on a collision course with Germany over steps to contain the debt crisis.

The idea of bonds sold jointly by the euro area’s 17 nations remains alive because unprecedented bailouts by governments and the ECB have failed to stamp out debt concerns that began in Greece almost two years ago and rattled markets in AAA-rated France last month.

Germany’s government remains “expressly” opposed to the collective debt instruments, Roesler said today. “We cannot be responsible for the debts of other countries,” the economy minister told reporters in Rome.

Standard & Poor’s in May and Moody’s Investors Service in June warned that they may downgrade Italy, saying the government may miss its revenue and deficit targets amid chronically sluggish economic growth and possible political instability. Italy’s economy will contract 0.1 percent in the three months through September, the Organization for Economic Cooperation and Development forecast last week.

Plan for Growth

Finance Minister Giulio Tremonti said on Sept. 10 that Italy would review its policies on economic growth, once the austerity plan was approved. “If there are things to change in our growth measures we will, and if there are things to add, we will,” he told reporters at a meeting of G-7 finance ministers in Marseille, France.

Seeking to boost their economy, Italian officials have met in the past month with delegates from China Investment Corp. to discuss investments in the European country, an Italian official familiar with the matter said on Sept 12. Government-bond purchases were not the focus of the talks, he added. The Financial Times reported that debt sales were on the agenda.

Italy and China have “had chances to talk about investments and even bonds,” Industry Minister Paolo Romani told reporters in Rome today. While “Italy doesn’t rely on China’s support” for its debt, “I don’t see why they shouldn’t’ buy Italian bonds. That’s the market.”