Italy looks set to pass austerity package

Fears over Italy’s debt receded today as attention switches to the US

Fears that Italy would trigger a new and more serious debt crisis in the Eurozone receded today as Italian Senators gather to vote on a €47bn package of austerity measures to balance the budget by 2014. The Deputies in the lower chamber are also expected to pass the measures when they vote tomorrow, reassuring the markets that Italy would still be able to finance its debt repayments.

Opposition parties have pledged to support the measures despite the increasing weakness of the Berlusconi government and the reported differences between the prime minister and his highly regarded finance minister Giulio Tremonti. The treasury’s €5bn bond auction today is also expected to go well.

Fitch Ratings reacted positively to the package, describing it as “an ambitious fiscal consolidation plan”. Mario Draghi, governor of the Bank of Italy and incoming European Central Bank president, said the plan is “an important step in strengthening the public accounts”. However, for Italy’s sovereign credit profile and rating to remain at AA-, the package would have to be implemented, Fitch warned.

David Riley, Fitch’s head of global sovereign ratings, said: “The sharp rise in Italian and other euro zone government bond yields in recent weeks reflect a crisis of market confidence in the European policy response to the euro zone debt crisis, rather than deteriorating sovereign credit fundamentals.”

Standard & Poor’s and Moody’s Investors Service had indicated that they were reviewing Italy’s rating for a possible downgrade. The cost of financing Italy’s debt has increased 50% in a month.

Italy is expected to spend at least €75bn financing its debt this year. Italy still needs to sell about 90 billion euros of bonds this year, about 41 percent of the total for 2011, with a financing hump coming in September when 46 billion euros of debt matures, analysts at BNP Paribas estimate.

Attention is turning to the US, after Moody’s warned that the United States may lose its top credit rating if Obama fails to get agreement between Democrats and Republicans on measures to pay the country’s debts.

The White House and Congress must agree on a deal to raise America’s debt limit by August 2, or the government will run out of money to pay its bills and default on some obligations. Also placed on review for possible downgrade are the Aaa ratings of financial institutions directly linked to the US government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks and the Federal Farm Credit Banks.

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