Italian cabinet in emergency session over debt cost crisis

THE Italian cabinet met in emergency session last night under huge pressure after the cost of debt rose to levels similar to those that forced Ireland and Portugal to look for a bailout.

As fears grew for indebted Italian banks, president Giorgio Napolitano issued a statement in which he came close to calling for the government’s resignation and intimating he would form a government of national unity.

The situation has reached crisis proportions, given the continuing rise in the cost of Italian bonds, which at one stage yesterday reached 6.34% for 10-year bonds, just very slightly below August’s record rate.

This is higher than the 6.06% the country had to pay at an auction last week, which was especially worrying as the European Central Bank has continued to purchase them since early August. Italy needs to roll over close to €300bn of debt next year .

The country’s €1,9000 billion debt is the second highest as a proportion of GDP in the euro area and Italy is the eurozone’s third biggest member. Bailing it out would cast a question mark over the future of the currency.

Last night’s cabinet meeting was to concentrate on fast-tracking measures to tackle the growing crisis after Silvio Berlusconi’s government failed to have reforms passed aimed at cutting debt of 120% of GDP.

The latest measures, promised by Mr Berlusconi to the European Commission early last week, include making labour laws more flexible and raising the pension age in an effort to create jobs and growth in an economy that has stagnated over the past decade.

The controversial prime minister wants to have a package ready to present to the G20 meeting, which he will attend this afternoon in Cannes.

They will be looking for real action to remove the country from the danger of contagion, especially now that Greece has once again unsettled markets with its plans for a referendum on its second bailout package.

Markets reacted well to news of the cabinet meeting. Shares in Italian banks recovered somewhat, helped by rumours the Bank of Italy would swap short-term Italian government bonds in exchange for buying more debt with a longer maturity.