ITALIAN PRIME minister Silvio Berlusconi has vowed to expedite austerity measures in a dramatic attempt to end financial market speculation that sent the country’s borrowing costs spiralling upwards in recent weeks.
In a day of blistering bilateral phone talks yesterday, leaders from Germany, France and Britain piled pressure on the Italian leader to bring forward economic reforms and balance Italy’s budget by 2013.
The announcement helped to calm financial markets, which have been in turmoil for more than a week.
About $2.5 trillion has been wiped off world stocks this week on worries the euro zone debt crisis was spreading. Fears the US was slipping back into recession also contributed, but yesterday’s better than expected US jobs figures for July also worked to support markets. European stock markets recorded losses as the news about Italy came late in the day, but Wall Street closed up.
Last night, however, ABC News reported that a government official had said that the White House was expecting bond rating agency Standard Poor’s to downgrade US debt from its current AAA value.
The parliament in Rome may be reconvened as early as next week to vote on measures to liberalise the labour market, introduce a so-called “debt brake” to guarantee balanced budgets, prepare for a quick sale of state assets and prise open protected professional services sectors.
“We consider it appropriate to introduce an acceleration of the measures which we introduced recently in the fiscal planning law to give us the possibility of reaching our objective of balancing the budget early, by 2013 instead of 2014,” said Mr Berlusconi at a hastily convened press conference in Rome yesterday.
His announcement – two days after claiming no further reforms were necessary – followed reports that the European Central Bank will buy Italian sovereign bonds, easing Rome’s financial woes, in exchange for a faster reform pace.
Italy’s borrowing costs fell yesterday, but pulled ahead of Spain for the first time in a year, as its bond yields fell by more than Italy’s.
Yesterday’s flurry of political activity in the midst of the summer holiday season triggered a euro rally and a partial recovery on European financial markets after the biggest weekly decline in nearly three years.
EU officials and EU leaders insisted yesterday that market nervousness was down to irrational fears rather than dramatic economic revelations in Italy or Spain.
“Such dramatic changes in the markets are incomprehensible,” said EU monetary affairs commissioner Olli Rehn. “It is not as if the fundamentals of the Italian or Spanish economies have changed overnight.”
Two weeks ago euro zone leaders reached agreement on fresh aid for Greece and further powers for the €440 billion EU bailout fund.
Mr Rehn conceded that the measures had failed to work as planned, saying “markets have not reacted as we expected or hoped for to the measures agreed by euro area heads of state and government on 21 July”.
Yesterday’s announcement of Italy’s reform plan is intended to calm markets and bridge the gap until national ratification of the measures next month, possibly buttressed by further measures to be agreed. The first test of this strategy will come when markets reopen on Monday.
Analysts are worried that the EFSF fund in its current form lacks the financial firepower to rescue Italy, whose debt amounts to 120 per cent of economic output, about double that of Spain.
Chancellor Angela Merkel and French president Nicolas Sarkozy discussed the euro zone’s instability in separate telephone conversations with US president Barack Obama.
The Government said there were no plans to recall the Cabinet in response to the unfolding crisis. – (Additional reporting Reuters)