The Italian Economic Predicament

Posted on December 2, 2011 in GlobeScope

By Brototi Roy:

Economist Mario Monti, who accepted the enormous responsibility of rescuing Italy from its current financial predicament and was appointed by President Giorgio Napolitano to lead a technocrat government, is now facing the daunting challenge of reassuring nervous investors that the newly formed government has strategies to overcome the distressing debt crisis of Italy, as Italy’s borrowing rates skyrocketed in a dismal auction of bonds Tuesday.

Though Italy was able to raise euro 7.49 billion ($10 billion), it still requires to pay more to the investors in order to induce investment.

The yield on Italy’s 3-year bonds surged to 7.89 percent in Tuesday’s auction, a total of 2.96 percentage points higher than October, 2011, whereas yields on 10-year bonds spiked to 7.56 percent, up 1.5 percentage points from last month. However, both rates are unsustainable for the long-term, on par with levels which compelled other eurozone governments to seek bailouts.

Italy, which is eurozone’s third largest economy, has debts amounting to 120 percent of its nation income, and is worth euro1.9 trillion ($2.5 trillion). It is considered too big to be bailed out under the current circumstances.

“Italian bond auctions are become more nerve-racking by the week,” said Nicholas Spiro of Spiro Sovereign Strategies. “Today’s is another confirmation, if it were needed, that things are going from bad to worse.” He further added, “This is an externally driven deterioration in Italy’s creditworthiness, and the way to contain this crisis is to gradually restore confidence, and shore up the eurozone sovereign debt.”

President Monti who had told the nation, “There is an emergency, but we can overcome it with a common effort,” shortly after he took the responsibility to lead the country and invoked confidence by claiming, “In a moment of particular difficulty, Italy must win the challenge to bounce back, we must be an element of strength and not weakness in the European Union, of which we are founders,” tried to assure investors once again last Tuesday. “If we do good work, we will help Italy get out of a very difficult situation, and perhaps we’ll also help the political forces that have given us their trust to re-establish a more serene climate among themselves, and reconciliation with public opinion,” Monti said.

The EU monetary chief, Olli Rehn, also tried to reassure markets. After meeting in Rome with Monti, he praised new economic reforms that are “going in the right direction,” such as liberalizing professions, encouraging employers to hire, and making it easier for them to transfer workers.

In one sign of improvement, Italy’s lower house of parliament was preparing to introduce an EU-backed measure to amend the constitution to require a balanced budget. The step would be the first action towards the long process of stabilizing the economy since the amendment must be approved twice in both houses, the second time after a six-month interval.

Monti was on his way to Brussels for a eurozone finance ministers meeting Tuesday evening expecting to form convincing measures to save the 17-nation euro.

Brototi is a Foreign Affairs Correspondent at Youth Ki Awaaz.

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