Italy: between a new promise and old threats

Seventeen years after arriving on the Italian political scene, Silvio Berlusconi resigned as Prime Minister, opening the way for a technocrat government led by economist Mario Monti.

The announcement caused some celebrations, but president Giorgio Napolitano (pictured) warned that the excessive levels of public debt had left the country in a deeply fragile state, carrying “a burden which, given the strong surge of yields on Italian treasuries and the stagnation of the economic activity, risks compromising joint reform efforts. From tomorrow to the end of April, €200bn-worth of treasuries (BTP) will need to be replaced into the market,” he said.

It is clear that if markets have been the main driver of this political shift, they will also be its first and foremost judge, and this week responses by global markets are regarded by Italian politicians as both the target and the benchmark of their activity.

The government is seeking to heal financial indicators of the country’s reliability, which saw spreads between German bunds and Italian BTP soar to 570 bp last week, while yields on 10-year treasuries crossed the 7% threshold.

The FTSE MIB, the country’s main index, was up 1.7% shortly before falling back to a more moderate 0.53%, more in line with the German Dax (0.16%) and the French Cac 40 (-0.25%).

The bund-BTP spread recovered to 455 bp and yields on the benchmark 10-year bonds decreased to 6.3% today, but the latest 5-year BTP auction posted a yield of 6.29%, the highest in 14 years. The auction still managed to sell all €3bn of bonds into the market, following a similar success last week.

Charged with the resolution of the largest public debt in Europe, with €1.9trn, or 120% deficit to national GDP, former European commissioner Monti is expected to name a list of 12 ministers by the end of the week. Commentators are forecasting the passage to a Bocconi-style government, as Monti will likely appoint a team of high-profile professors from Milan-based private university Luigi Bocconi, of which he is currently president.

Monti stressed that the situation requires equal measures of urgency and prudence: “The country has to win the battle of redemption, and to become an element of strength within EU rather than one of weakness. It has to kick-start the economic growth with a focus on social equity. We owe it to the future generation,” he said yesterday in his first statement as prime minister.

Berlusconi’s resignation prompted a positive reaction from international institutions and press but sparked mixed feelings at home. While a survey by public pollster Demopolis revealed last week that 75% of the population would have welcomed his resignation, the electorate fears it is at the mercy of external forces rather than in control of its own destiny.

Susanna Camusso, secretary of the CGIL, the country’s largest union, and one of the potential roadblocks on the road to reform, noted the country saw its own dissatisfaction regarded as less important than the pressure from global markets. 

The Demopolis survey also revealed a feeling that Berlusconi’s presence continues to hang over the Italian political scene. The departing prime minister yesterday reinforced that feeling with a parting shot: “Starting from tomorrow, I will renew my political commitment in parliament and I will not surrender until we succeed in modernising the country.”

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