Bond sale eases pressure on Italy

Market pressure on Italy eased slightly today after the president vowed to accelerate reforms to make way for Premier Silvio Berlusconi’s resignation as early as this weekend and a bond sale went better than expected.

President Giorgio Napolitano assured investors that Mr Berlusconi will step down, as promised, after reforms are passed – likely by Saturday.

He named respected economist Mario Monti senator for life in a move that puts him in line to run the next government.

In what may bode well for a smooth transition, Mr Berlusconi congratulated Mr Monti on his new post in a telegram, wishing him “fruitful work in the country’s interest” and recognising his achievements.

Italy is under intense pressure to prove it has the political strength to enact measures to increase confidence in its ability to repay its debts, which stand at a huge 120% of economic output.

But economic growth is weak and the government failed to enact reforms to revive it over the past decade.

Investors are worried that if Italy’s borrowing rates remain too high for too long, it will be blocked out of financial markets and need rescue loans to repay its bondholders. That would be devastating for both the euro and the global economy.

Political sentiment appeared to be building in favour of a government of technocrats headed by Mr Monti, the clear preference of international investors.

The elegant, gray-haired 68-year-old, made his reputation as a strong-willed economist when as EU competition commissioner he blocked General Electric’s takeover of Honeywell. He currently heads Milan’s prestigious Bocconi University.

Mr Napolitano, who is charged with finding a candidate to form a new government, will want to ensure the new administration enjoys broad support in parliament so it can not only get reforms passed but also implemented.

Mr Berlusconi’s party remained split on whether to support Mr Monti although some key elements have signalled support, while the allied Northern League, Mr Berlusconi’s key coalition partner, were staunchly opposed.

The main opposition parties appeared willing to accept Mr Monti and a technocratic government, but some more hard-line elements of the left, including unions, remain opposed.

Angelino Alfano, who Berlusconi hand-picked to succeed him as leader of the main conservative party, the told Italian TV on Wednesday that Berlusconi would step down by Monday. Foreign Minister Franco Frattini said early elections would not help the country solve its economic problems – a clear message to a group within in Berlusconi’s party that is pressing for a vote.

“It would be prudent not to rush to the ballots, plunging the country into a three-month electoral campaign as spreads fly and our debt rises,” Frattini said.

Italy’s leading business newspaper summed up the growing sentiment with an enormous bold-faced headline: “Hurry Up.”

The country’s situation became critical on Wednesday, when the 10-year bond yield jumped above the perilous 7 % mark on worries that the tenacious Mr Berlusconi would not leave easily, despite a promise to resign after reforms were passed.

Greece, Portugal and Ireland eventually had to seek bailouts after their borrowing rates rose above 7 %.

The yield eased back below 7% today, to 6.88% by early afternoon, after a bond sale went better than expected.

The government easily sold €5bn in 12-month bonds at an interest rate of 6.087 %.

That’s up sharply from 3.57 % in the last such auction last month, but well below analyst expectations of 7 %. Demand for the bonds was also strong, almost twice the amount on sale.

Italy, which as total debt of €1.9trn, has to tap financial markets for over €300bn in 2012 alone.