ECB steps up pressure on Italy as debt worries grow

City A.M. Reporter
European Central Bank President Jean-Claude Trichet has told Italy to deliver on promises to control its strained public finances and reform its economy, adding to international pressure on weakened premier Silvio Berlusconi.

ECB support for Italy is vital because the Frankfurt-based central bank has been buying Italian bonds in markets to keep yields low enough for Rome to continue borrowing without needing outright aid from the EU or IMF.

Trichet said measures promised on August 5, when Berlusconi said he would balance the budget by 2013 and launch major economic reforms, were "extremely important."

"It is therefore essential that the objectives announced for the improvement of public finances be fully confirmed and implemented," he said in an interview with Italian business daily Il Sole 24 Ore on Friday.

Trichet's comments underline rising concern at Italy's haphazard progress in agreeing measures to bring its strained public finances under control.

"In the case of Italy, financial markets, domestic and international investors are worried about the credibility of economic policy," said Nouriel Roubini, one of the economists who predicted the global financial crisis.

"There are fears that the leadership of the country is damaged," he said at a conference in the northern Italian town of Cernobbio.

Hampered by deep political and personal divisions, the government has struggled to come up with a coherent plan since the August 5 pledge, proposing and then rapidly abandoning a series of measures from a tax on high earners to changes on pension rules.

Ministers have insisted the commitments will be respected but critics from the hardline CGIL trade union to Confindustria have blasted the flip-flopping.

The employers' federation described the measures on Thursday as "weak and inadequate".

Berlusconi, already reeling from a string of scandals, was hit by fresh revelations from an extortion court case on Thursday.

His isolation was underlined by bitter comments from a police wiretap in July in which he spoke of leaving "this shitty country" in a few months and said he was "disgusted" with Italy.

Market doubts about Italy and its €1.9 trillion (£1.7 trillion) debt pile have been reflected in the yields on ten-year government bonds, which have crept up steadily since the ECB intervened last month to buy Italian paper.

Yields on the bonds, which had fallen from record levels of over 6 per cent last month, have since come back up to 5.24 per cent. Economists generally agree levels around 7 per cent would be unsustainable for the government.