European Central Bank's Boost for Italy, Spain Loses Steam

Aug. 8, 2011
'Exit from the crisis ... is still far away.'

Signals from the European Central Bank that it would intervene on Italian and Spanish bond markets failed to stop a slide on stocks in Milan and Madrid on Monday, as anger rose over the conditions set by the ECB.

The main FTSE Mib index in Milan closed down 2.35% after a highly volatile session, while the IBEX-35 in Madrid dropped 2.44% in line with other international stock markets dragged down by the sharp falls on Wall Street.

The risk premium on Italian and Spanish 10-year government bonds meanwhile came off the record highs reached last week but remained elevated despite a promise from the ECB to "actively implement" its eurozone bond-buying program.

"The ECB has earned us some time but an exit from the crisis for Italy, Europe and the United States is still far away," Mario Noera, a professor at Bocconi University in Milan, was quoted as saying on financial website

Italy's promise to speed up planned budget cuts and Spain's announcement over the weekend of measures to save an extra 4.9 billion euros ($7 billion) also ultimately proved unable to hold back the sell-off on stock markets.

Nuria Alvarez, analyst at Spanish brokerage Renta4, however said ECB action had led to "a very big reduction in the debt spreads for both economies."

Regarding the government announcements in Madrid and Rome, she added: "We see any step that can help comply with the deficit goals as positive."

Spain has launched reforms to strengthen bank balance sheets, cut spending, raise the retirement age, open up the labor market and sell off assets.

But Spain's faltering economy, with an unemployment rate of 20.89%, slowed in the second quarter, complicating its efforts to cut the deficit.

Italy's growth rate instead accelerated from 0.1% in the first three months of the year but clocked a still sickly 0.3% in the second quarter.

Italian daily Corriere della Sera meanwhile revealed the contents of a letter to Berlusconi from ECB chief Jean-Claude Trichet and Italian central bank governor Mario Draghi spelling out the measures the government should take.

The priorities identified in the letter were the privatization of municipal services and an overhaul of labor laws. It also called for liberalization reforms to be passed by government decree to speed up their approval.

The reported diktats from the ECB stirred anger against Berlusconi.

"What are the ECB and the international institutions really asking of us?" said Pierluigi Bersani, leader of the main opposition Democratic party.

"A powerless, totally discredited government that is now under external administration should at least tell us what is really going on," he said.

Guido Compagna, a commentator for, wrote: "Berlusconi is reluctant to have his government dictated to by France and Germany but he sees it as the only way to stay in power" until his mandate runs out in 2013.

Carlo Maria Pinardi, an economics professor at Bocconi University in Milan, said: "Italy always needs to see the edge of the abyss to start doing something.

"The government's current weakness has definitely contributed to economic and financial deterioration, requiring stronger external pressure," he said.

Tensions within Berlusconi's coalition government and a series of recent setbacks for his People of Freedom party have added to investor concerns in recent weeks over the government's ability to implement deficit-cutting reforms.

In Spain, the conservative opposition party holds a 12-point lead over the ruling Socialists ahead of November elections, an opinion poll showed on Sunday.

The poll, by the DYM institute for the conservative daily ABC, would see the Popular Party romp back into power after eight years in opposition.

Italian lawmakers meanwhile have been called back from summer recess this week for talks on Thursday to introduce a constitutional amendment to enforce balance budgets and to enact a series of long-delayed labor market reforms.

The government has said it will speed up implementation of the 48-billion-euro ($69-billion) cuts approved by parliament last month but the center-left opposition complains Italy's poorest will be hit hardest by the austerity.

Italy's public deficit of 4.6% of gross domestic product (GDP) last year was relatively modest by European standards, but its public debt is among the highest in the world and the economy's growth is anemic.

Spain has also announced plans to slash its public deficit from 9.2% of GDP last year to 6% in 2011 and 4% in 2012 and then to 3% -- the official EU maximum -- in 2013.

Copyright Agence France-Presse, 2011

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