Italy eyes austerity plan under market pressure

AFP, Monday 20 Jun 2011

Government speeds up preparations for 40 billion euro austerity plan that aims to shrink the public deficit to 0.2 per cent of GDP by 2014

Italy wobbled on financial markets on Monday after debt warnings from Moody's ratings agency and Eurogroup chief Jean-Claude Juncker, while the Italian government reels from two stinging poll defeats.

The benchmark index on the Milan stock exchange closed down more than two per cent, with investor worries hitting bank stocks in particular.

Shares in Banca Popolare di Milano plunged 7.39 per cent to 1.628 euros and Banca Monte dei Paschi di Siena fell 2.59 per cent to 0.583 euros.

Oil major ENI fell 1.69 per cent and auto giant Fiat was down 0.80 per cent.

Market pressure has forced the government to speed up preparations for a 40 billion euro (57 billion dollar) austerity plan intended to bring its public deficit to just 0.2 per cent of gross domestic product (GDP) by 2014.

"The context could not be more difficult," said Marco Valli, an economist at UniCredit, Italy's largest bank. He said investors needed "credible objectives" from Economy Minister Giulio Tremonti as Italy's economy struggles.

There was more bad news on the economy on Monday as official data showed industrial orders plunged by 6.4 per cent in April from March.

Orders had gone up 8.0 per cent in March but were dragged down by a sharp drop in foreign orders and a fall for the electronics sector.

The Italian economy grew by just 0.1 per cent in the first three months of the year and the country has averaged very low growth for the past decade.

Eurogroup head Jean-Claude Juncker warned on Saturday that the euro crisis hitting Greece and others could affect Italy and Belgium, saying in an interview with a German daily: "We are playing with fire."

Juncker, prime minister of Luxembourg and leader of the eurozone finance ministers, told Suddeutsche Zeitung that the crisis could also hit, "due to their high levels of debt, Belgium and Italy, even before Spain."

Italy's centre-right government has committed to reducing its public debt and deficit levels to meet European Union commitments within a few years.

But a round of 25 billion euros in austerity cuts last year sparked social tensions and the government is on the backfoot after crushing poll defeats.

Local elections in May saw the left take control of Prime Minister Silvio Berlusconi's fiefdom in Milan and he was beaten again on June 14 when Italians voted to abolish laws on nuclear power and legal immunity for the premier.

As shares dropped on Monday, Emma Marcegaglia, head of the Italian employers' federation Confindustria, called for an immediate overhaul of the tax system and austerity cuts to restore confidence on financial markets.

"At this sensitive moment... it's essential to approve the 40-billion-euro austerity plan as soon as possible," Marcegaglia said.

"At the same time there need to be a series of measures to aid growth, like tax reform including a lowering of taxes on businesses," she added.

One factor worrying investors at the moment is political uncertainty due to rising tensions between Berlusconi's People of Freedom party and its powerful coalition partner, the Northern League party, experts said.

Northern League leader Umberto Bossi called for tax breaks on Sunday, saying: "People are more important than markets."

Tremonti has been more cautious, saying any reductions have to be fully funded.

On Friday, Moody's said it had placed Italy's Aa2 local and foreign currency government bond ratings "on review for possible downgrade, while affirming its short-term ratings at Prime-1."

There was a similar credit warning from Standard & Poor's last month.

"The Italian economy faces growth challenges in an environment characterised by long-term structural impediments to growth and potentially rising interest rates," the ratings agency said in a statement.

"Structural economic weaknesses -- mainly low productivity and important labour and product market rigidities -- have been a major impediment to growth in the last decade and continue to hinder the economy's recovery," it said.

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