Monday, December 26, 2011

Italy: Prime Minister Mario Monti struggles to lower borrowing costs

          The new technocrat prime minister of Italy Mario Monti had his budget plan approved by parliament. At first his appointment soothed markets and lowered Italy's surging borrowing costs but the effect seems to be petering out already.
   Italy faces 69 billion in costs to repay debts early next year. Italian bond yields are again approaching the 7 per cent level. Even though Monti was able to push through a budget package, investors still drove the yield on ten year bonds to 6.91 per cent. At 7 per cent Greece, Ireland, and Portugal all were forced to seek bailout money.
   On Nov. 9 the yield on Italy's 10 year bonds reached a record 7.48 per cent. The appointment of Monti and his strenuous efforts to reduce Italian spending managed to get the rate down to 6.26 per cent on Dec. 6. Now the yields are tending up to the danger level again. Monti told the Senate members: “It is essential that Italians buy government bonds and treasury bills, whose yields are very high. We must trust ourselves.”
   The government is selling many securities before the end of the year including ten year bonds. These will show whether the situation is getting worse. Italy has a debt of 1.9 trillion Euros and a considerable amount must be paid during the first quarter next year.
   Analysts pointed out that the debt crisis is giving Monti the leverage he needs to force structural reforms upon the Italian economy. Monti said that he is focusing his attention on making the labor market less rigid and streamlining the welfare system. Translated this means weakening the power of labor and reducing the social safety net. Analysts also point out that the measures may push Italy into recession. For more see this article.

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