Italy drifts back into the firing line

October 30, 2012

Following Silvio Berlusconi’s threat to demolish Mario Monti’s government, Italy will try to sell up to four billion euros of five- and 10-year bonds at auction today. It will get away but investors could be forgiven for being nervous. Monti was in Madrid yesterday and issued a veiled plea for Spain to seek help from the euro zone rescue fund, which would trigger ECB bond-buying, in the hope that would drive down Italian borrowing costs too. But Spain, with nearly all of its 2012 funding done, is in no hurry.

Monti continues to insist Italy doesn’t need to seek help itself but said the ECB needed to be seen in action, rather than just offer speculators the threat that it could intervene, in order to keep the euro zone shored up. One suspects that is true.

Also last night, Sicilian election results showed the centre-left Democratic Party and anti-establishment 5-Star movement cleaned up at the expense of Berlusconi’s party. Perhaps the most worrying figure was the record low turnout by an electorate disillusioned by constant austerity. The possibility of Monti retaining the premiership after spring 2013 elections has helped keep market attacks at bay. In reality, that looks unlikely although he could take over the presidency to retain some voice and influence. The fractured nature of Italian politics raises the threat of no solid government emerging from the general election. Fitch cut Sicily’s rating to BBB late yesterday and warned of more to come.

Spain may be in a comfortable position as far as its debt financing needs are concerned but its economy is in dire shape. After some ghastly retail sales figures on Monday, third quarter GDP data are expected to confirm its recession is deep and persistent, with GDP forecast to fall 0.4 percent on the quarter, the same pace as it contracted in Q2. For that reason, there are still powerful incentives to seek help at some point.

In Athens, there was a chink of light with the PASOK party, number two in the coalition, hinting it will support the government’s austerity package needed to secure the next tranche of EU/IMF money to keep Greece afloat. A final agreement to secure aid to save it from bankruptcy has been held up by the refusal of the Democratic Left party, the smallest partner in the three-party coalition, to back private-sector wage cuts. The bigger two parties could just carry the vote in parliament without the Democratic Left but any internal rebels will  make it too close for comfort. Today, lawmakers vote on a privatization law, the first in a series of votes to test the ruling coalition.

Plenty more shuttle diplomacy with Wolfgang Schaeuble and Pierre Moscovici, the German and French finance ministers, meeting in Berlin, and Angela Merkel seeing IMF chief Christine Lagarde and the heads of the WTO, World Bank and OECD later in the day.
Germany retained an ally in the austerity debate after Dutch Prime Minister Mark Rutte’s Liberals agreed a coalition with the Labour Party and vowed to stick to a path of debt cutting.

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