ECB tells Italy to deliver on cuts

European Central Bank president Jean-Claude Trichet told Italy's struggling centre-right government to deliver on its promised austerity package, adding to international pressure on weakened premier Silvio Berlusconi.

ECB support is vital because the bank has been buying Italian bonds in markets to keep yields low enough for Rome to continue borrowing without needing to reach out for outright aid from the EU or IMF.

Mr Trichet said measures announced on August 5th, when prime minister Silvio Berlusconi pledged to balance the budget by 2013, were "extremely important".

"It is therefore essential that the objectives announced for the improvement of public finances be fully confirmed and implemented," he said in an interview with Italian business daily Il Sole 24 Ore.

Mr Trichet's comments underline rising concern at Italy's haphazard progress in agreeing measures to bring its strained public finances under control, joining the Bank of Italy, the European Commission and employers federation Confindustria.

Hampered by deep political and personal divisions, the government has struggled to come up with a coherent plan since the August 5th pledge, proposing and then rapidly abandoning a series of measures from a tax on high earners to changes on pension rules.

Ministers have insisted the pledges will be respected but critics from the hardline CGIL trade union to Confindustria have blasted the flip-flopping. The employers' federation described the measures on Thursday as "weak and inadequate".

Market doubts about Italy and its €1.9 trillion debt pile have been reflected in the yields on 10-year government bonds, which have crept up steadily since the ECB intervened last month to buy Italian paper.

Yields on the 10 year bonds, which had fallen from record levels of over 6 per cent last month, have since come back up to 5.2 per cent. Economists generally agree levels around 7 percent would be unsustainable for the government.

Spreads over benchmark German bonds also widened today to 315 points - the widest since the ECB started buying Italian debt.

In his comments to Il Sole 24 Ore, Trichet made no direct comment on the merits of the €45.5 billion package currently making its way through parliament but other policymakers have been more blunt.

Austria's central bank governor and ECB council member Ewald Nowotny said Italy could not be allowed to backslide on the commitments made last month when markets were pushing its borrowing costs out of control.

"I see this with great concern," he told reporters late yesterdyay, adding that the ECB had agreed to shore up Italian bonds on the basis that state finances would be brought under control.

"I take this very seriously and I see this also as a question of the credibility of Italy's cooperation with the European programme," he said.

The ECB wrote to the Italian government before intervening in the market, apparently laying out demands for action on consolidating the budget although the exact terms of what it required have not been revealed.

Mr Trichet denied that there had been a direct, negotiated agreement, saying merely that the central banks had provided its analysis of the situation.

But Mr Nowotny said there was a direct link between the ECB's bond buying and Italy's commitment to reform.

"It is fully clear and this is no secret that this programme was started on the basis of a letter that was sent to the Italian government and that had certain considerations were developed on how Italian state finances could be put on a sustainable path again."

Reuters