Italy austerity nears approval as pressure mounts

By James Mackenzie

ROME (Reuters) - Italy's lower house of parliament is expected to approve the center-right government's much revised austerity plan on Wednesday as Rome struggles to stem a financial market crisis now threatening the whole euro zone.

The 54 billion euro ($73.80 billion) mix of tax hikes and spending cuts aimed at balancing the budget by 2013 was agreed under heavy pressure from the European Central Bank which has demanded tough action from Rome to cut its massive public debt.

Whether that is enough to draw a line under a crisis which has driven Italy's borrowing costs to potentially unmanageable levels and brought it to the brink of financial meltdown remains to be seen.

Markets made nervous by the continuing problems in Greece have turned on Italy with a vengeance over the past two months, hammering bonds and banking stocks amid doubts about its economy and the sustainability of a 1.9 trillion euro debt mountain.

An auction of long term bonds on Tuesday saw 6.49 billion euros of securities sold but forced the Italian Treasury to offer record interest on 5 year paper.

Only the ECB intervention has held back market pressure but the steady rise in yields over the past week, almost to where they were when the central bank began its bond buying, shows how much sentiment has turned against Italy.

Yields on Italy's 10 year bonds stood at 5.7 percent on Tuesday, not far off levels of just over 6 percent seen before the ECB intervention while the spread over benchmark German debt climbed as high as 404 basis points before easing back to 387 points in the afternoon.


Too big to bail out in the way smaller countries like Greece and Ireland have been, Italy, the euro zone's third largest economy, has the potential to trigger a breakdown that could tear the single currency apart.

Plagued by personal scandal, Berlusconi's previous boast of having kept Italy out of the debt crisis has been destroyed by the turmoil of the past months and there have been growing calls for him to step down.

His fractious coalition fought over the austerity package for weeks, chopping and changing the plan four times before the final version was agreed in the face of opposition to central parts of the plan by Economy Minister Giulio Tremonti.

Along with a public debt burden that is second only to Greece in the euro zone at 120 percent of gross domestic product, Italy has one of the world's most sluggish economies, making long-term debt reduction almost impossible.

Italian officials have already said that further measures could be introduced once the austerity package is passed, with possible options including the sale of state property holdings and other assets as well as longer term structural reforms.

Prospects for growth appear increasingly dim however, with the Bank of Italy forecasting a rate of less than 1 percent this year and next and many private economists expecting Italy to tip back into recession in 2012.

Berlusconi has pledged reforms to cut down barriers holding up Italian competitiveness but there has been only halting progress on making labor markets more flexible, opening up competition or improving the efficiency of the public service.

The measures included in Wednesday's austerity package, which has already been passed by the Senate include a one percentage point increase in value added tax, bringing forward plans to increase the pension age for women and a special levy on energy companies.

Italian media have reported that other measures, including a wealth tax on privately held assets and even more radical changes to the pension system are being considered if further measures to restore confidence are needed.

($1=.7317 Euro)