Italy Unveils EU80 Billion Plan to Boost Economy

By Lorenzo Totaro

Nov. 28 (Bloomberg) -- Italy unveiled an 80 billion-euro ($102 billion) economic-stimulus plan that includes cash payments to low-income families, mortgage relief and stepped up public works spending.

“Today with this plan there are 80 billion euros of resources that will pass from the public accounts to the private economy,” Prime Minister Silvio Berlusconi said after a Cabinet meeting in Rome to pass the measures.

The plan will include more than 16 billion euros of public works spending that will be approved next week, Berlusconi said. Italy will distribute about 2.4 billion euros in one-off cash payments to the country’s poorest families from Jan. 1. The government will force banks to limit rates charged on variable rate mortgages, while agreeing to underwrite new bonds to allow them to increase their capital levels.

Today’s measures are part of a European Union effort to counter the impact of worldwide financial turmoil that has shut down access to funding, roiled stock markets and sent household and corporate confidence into a tailspin. The EU on Nov. 26 announced a 200 billion-euro stimulus plan after the euro-area economy slipped into its first recession since the start of the single currency.

Italian Recession

Italy’s economy, the euro region’s third biggest, also fell into recession in the third quarter, and the International Monetary Fund forecast this month that the country’s gross domestic product will contract this year and next, boosting unemployment and the budget deficit.

The package of measures includes unspecified corporate tax breaks, a delay in payments of value-added taxes and quicker reimbursement of excess tax payments, Finance Minister Giulio Tremonti said.

To ease consumers’ pain the government will make payments to the poorest Italian families of as much as 1,000 euros. Toll rates on Italian highways will be frozen at current levels for the first six months of 2009.

Banks will be forced to link new variable-rate mortgages to the European Central Bank’s benchmark rate, rather than the current practice of tying them to floating, money-market rates, which have surged during the credit crisis. The government will also cap existing variable mortgages at 4 percent and reimburse homeowners the difference if their banks charge more.

Money Market Rates

Most banks in Italy link their variable-rate mortgages to the three-month or six-month Euribor rate, charging a premium of between 0.6 percent and 2 percent, said Massimiliano Romano, a banking analyst at Concentric Italy in Milan.

“This measure will likely have a time limit, it’s not something you can keep up indefinitely,” Romano said. “I would think banks will get something in return so I’d be curious to see what the terms of the agreement between the government and banks are.”

Berlusconi said that even with the economic slowdown and increased spending, the government would stick to its pledge to reduce Italy’s debt, the highest in the EU at 104 percent of GDP, to less than 100 percent in 2011.

To contact the reporter on this story: Lorenzo Totaro at in Rome or ltotaro@bloomberg.net