Monti plans measures to spur Italy's competitiveness and tackle debt sales

ITALIAN PRIME minister Mario Monti is prescribing more “aspirin” to revive an Italian economy that is probably in a recession and to tackle almost half a trillion euro in debt sales after the worst year on record for Italian bonds.

Mr Monti has pledged to prepare measures to spur competition and growth in the euro region’s third biggest economy before a meeting of European finance ministers on January 23rd.

The plan comes after he spent his first month in office enacting €30 billion in austerity and growth measures aimed at taming Italy’s surging borrowing costs.

“Monti has taken only one aspirin, now he needs to take two,” said Marc Chandler, chief currency strategist at Brown Brothers Harriman in New York.

Still, “investors are underestimating Italian resolve and European resolve to keep Italy in the monetary union” as well as “the range of tools Italy still can have with a strong leadership”, he said.

The key to the euro’s survival may lie with Italy, the region’s second-biggest debtor after Greece.

The nation must repay about €130 billion in debt in the first quarter of this year, with its 10-year bond yield close to the 7 per cent level that led Greece, Ireland and Portugal to seek bailouts.

The €1.76 trillion economy probably entered a recession in the three months to the end of December, its fourth since 2001, according to the government.

Italy sold almost €20 billion of debt last week with borrowing costs declining by almost half at a sale of €9 billion of six-month bills.

The auctions underscored how the European Central Bank is helping Italy tap markets after the Frankfurt-based institute loaned €489 billion to banks to ease credit.

The yield on Italy’s benchmark 10-year bond rose four basis points to 6.95 per cent at lunchtime yesterday in Rome, pushing the difference with German securities to 506 basis points.

Italy will seek to raise almost €450 billion in debt in 2012. Its next auction is on January 12th.

“Yields on shorter maturities have gone down substantially, signalling that, notwithstanding the extremely serious situation of government finances, market players saw the danger of a default receding,” said Marino Valensise of Baring Asset Management.

The yield on Italy’s two-year bond rose four basis points to 4.73 per cent yesterday, down from 7.66 per cent on November 25th, when it exceeded the yield on the nation’s 10-year benchmark bond by 12 basis points.

Italian and Greek bonds had their worst years on record in 2011 as Europe’s financial woes intensified.

Greek bonds lost 63 per cent, the largest since at least 2000, while Italian bonds dropped 5.7 per cent for the worst year since at least 1992.

While Italy’s budget deficit last year of 4.6 per cent of gross domestic product was almost half that of Spain, Spanish 10-year bonds yield about 1.7 percentage points less than equivalent-maturity Italian bonds. – (Bloomberg)