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Italian parliament adopts austerity budget

17 July 2011 No Comment

Italy’s parliament has given final approval to a whopping 48 billion euro ($63.67 billion) austerity budget aimed at slashing the public deficit by 2014 and reassuring nervous financial markets.

Friday’s adoption of the plan, which includes deep cuts to regional subsidies, family tax benefits and top-tier pensions, came just ahead of hotly awaited results of stress tests which were failed by eight of the 91 European banks being tested.

All five top Italian banks passed the tests with “an ample margin,” the central bank said, adding: “Even a sharp deterioration of sovereign risk would not impact the solidity of Italian banks.
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“The exercise confirms the adequacy of the capitalisation of Italian banks and the capacity to absorb the impact of a further deterioration in current macroeconomic and market conditions,” it said in a statement.

Italy has been swept by uncertainty on the markets in recent days and the central bank warned that if high long-term borrowing rates persist this would have “considerable costs” for public finances and risks for the economy.

The bank’s report added that recent tensions in the 17-nation euro zone had “increased the urgency of proceeding with a consolidation of public finances” in order to “lower risk premiums and diminish long-term borrowing rates”.

Financial markets are on edge as a crisis over the ability of heavily indebted European countries to repay their loans has threatened to spread to Italy and Spain – the euro zone’s third and fourth biggest economies.

“Very high public debt remains the most vulnerable point of the Italian economy, particularly in this climate of high uncertainty,” the EU’s Economic Affairs Commissioner Olli Rehn told La Repubblica daily in an interview.

“Intense negotiations are underway on what measures to take on Greece and how to avoid contagion,” Rehn said, as officials prepared for a crisis summit in Brussels in the coming days to discuss a possible second bailout for Greece.

Talks between the Greek government and private creditors ran into a second day in Rome on Friday after the International Monetary Fund urged banks and insurers to shoulder up to 33 billion euros of the costs of a new rescue.

Italy’s parliament has raced to adopt the austerity plan in record time after it was proposed just two weeks ago with the aim of cutting the deficit to 0.2 per cent of Gross Domestic Product by 2014 from 4.6 per cent last year.

The rate on Italian 10-year government bonds rose to 5.747 per cent from 5.626 per cent after the vote, indicating continued investor unease. Milan’s main stock index, the FTSE Mib, closed down 0.95 per cent.

While the central bank also raised its growth forecast for this year to 1.0 per cent from 0.9 per cent, it kept its prediction for 2012 at 1.1 per cent. The Italian economy grew by 1.3 per cent last year.

Italy is the world’s eighth-biggest economy but is laden down by a public debt of about 120 per cent of GDP, even though its annual budget deficit has remained relatively moderate compared to elsewhere in Europe.

Analysts have warned that Italy’s virtually stagnant economy and tensions within Prime Minister Silvio Berlusconi’s ruling coalition are potential risks but have dismissed the prospect of having to resort to a bailout.

Trade unions said they were opposed to the latest measures as did Emma Marcegaglia, head of the employers’ federation Confindustria.

Events in Italy were playing out against a backdrop of disarray in Europe as officials sought to resolve divisions over a new bailout for Greece and lay the ground for another debt crisis summit in the coming days.

Germany, Finland and the Netherlands argue that private banks should share the pain of aiding Greece even at the cost of allowing it to default.

The European Central Bank and several other euro zone nations object strongly to letting Athens default given the repercussions that could have.

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