Veritas: Italy sensitive to resignation rumours

Talk about the resignation of the finance minister Giulio Tremonti is doing the country no favours

Arguably, the admission by Italy’s highly regarded finance minister that he may have made undeclared payments for a flat in Rome is more serious in its implications than any more news about Italy’s economic problems. The markets will have discounted bad news about Italy debt, but not the possibility that Giulio Tremonti, in the eyes of many the man who can lead Italy out of its financial imbroglio, could be forced to resign.

Tremonti, anointed as a potential successor to Silvio Berlusconi for the elections in 2013, is widely regarded as having shielded Italy from the worst of the global financial crisis, with a policy of fiscal discipline that has won admirers across the political spectrum. As the Greek sovereign debt crisis threatens to envelop Italy, Italians and investors in Italian assets are viewing the possibility of Tremonti’s departure with some alarm.

Italy, along with Spain, is particularly vulnerable to a debt downgrade by the rating agencies. Italian and Spanish bond yields continue to rise, negating any positive message to come out of the EU bail-out agreed in Brussels last week. The euro is down 0.4% at $1.4275, though analysts fear it could fall further to $1.4150.

Yesterday, Italy’s €8bn bond auction did not go as well as hoped. Yields leaped to 5.77% on 10-year paper, and to 4.80% on three-year debt, the highest since July 2008. If the increase in yields develops into a trend, Italy could soon be facing its own debt crisis, analysts fear. Deutsche Bank, it has emerged, has cut its exposure to Italian debt by 88% over the past six months.

More immediately, rising borrowing costs could threaten Italy’s own contribution to the next tranche of aid for the Greek bail-out programme, piling further pressure on the other Eurozone leaders to add to their already stretched budgets. The terms of the bail-out have yet to be presented to national parliaments, with no developments expected before the year’s end.

In the meantime, Italy remains vulnerable in the debt markets. A resignation by Tremonti would have a disproportionate impact on the country and the markets. What Italians want is some good news. If at all possible, that the rumours about Silvio Berlusconi’s own resignation become fact. 

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