By David Tweed, Andrew Davis and John Fraher - Mar 1, 2012 6:01 AM GMT+0700
Italian Prime Minister Mario Monti, signaling the worst may be over for the euro region’s most distressed bonds, said he expects leaders to strike a deal by the end of the month on expanding a debt-crisis firewall.
While German Chancellor Angela Merkel has expressed reluctance to discuss increasing the size of Europe’s bailout kitty at a European Union summit in Brussels beginning today, Monti said he’s “confident” a deal will come.
Feb. 29 (Bloomberg) -- Italian Prime Minister Mario Monti says it's unlikely that Italian bond spreads will widen. Monti, speaking with Bloomberg Television's David Tweed in Rome, also discusses steps to prevent debt contagion. (Excerpts. Source: Bloomberg)
Feb. 29 (Bloomberg) -- Italian Prime Minister Mario Monti talks about the European sovereign-debt crisis, Italian bond spreads and the Greek bailout. He speaks with Bloomberg Television's David Tweed in Rome. (Source: Bloomberg)
Italian Prime Minister Mario Monti. Photographer: Mauro Scrobogna/LaPresse/ZUMAPRESS.com
“Size matters,” said Monti in an interview yesterday at the prime minister’s 16th-century residence in central Rome. “If the approach to firewalls is constructive enough in Europe, I believe we will all be in a better position to face any further contagion effect or any resurgence of the crisis.”
Monti is heading to a meeting of euro-area finance chiefs before the leaders’ summit as 1 trillion euros ($1.3 trillion) of emergency cash from the European Central Bank helps push the yield on Italy’s 10-year bonds -- and their risk premium to German securities -- to the lowest in six months.
“I don’t think it is likely” that spreads will widen again, Monti, 68, said in the interview, sitting in an ante-room of the Chigi Palace adorned by two 17th-century globes, a chandelier and gold colored wallpaper. “The unpredictability of spreads is not negligible. But we see now in the case of Italy a steady, although gradual decline in the last several weeks. I don’t see honestly any reasons why this course should change.”
Germany’s Stance
Asked about Germany’s issues with increasing the firewall, Monti said: “They didn’t say they don’t want to discuss this in March; they prefer not to discuss this on the 1st of March. March has, luckily enough, 31 days.”
Luxembourg Prime Minister Jean-Claude Juncker, who is chairing today’s euro finance ministers gathering, urged governments to expand the crisis firewall as soon as possible or risk losing momentum in the markets.
“It would not be the first time we would be a little bit too late,” he told reporters after an appearance at a European Parliament committee meeting yesterday.
Merkel’s government believes it’s the wrong time for a review of the ceiling of the 500 billion-euro European Stability Mechanism, the permanent bailout fund coming online this year, a German official told reporters in Berlin yesterday, speaking on the condition of anonymity. The official said narrowing bond spreads are reducing the urgency for a decision.
ECB Cash
Europe’s debt crisis has eased since the ECB started pumping unlimited amounts of three-year cash into banks in December. In the second operation, completed yesterday, 800 financial institutions flocked to the ECB to receive 529.5 billion euros in funds. Italian banks borrowed a net 139 billion euros, according to a person familiar with the matter.
The extra yield that investors demand to hold Italian 10- year bonds over German counterparts has narrowed to 337 basis points since hitting a euro-era record of 576 basis points on Nov. 9. The so-called spread on Spanish bonds has also plunged, declining to 318 basis points from a closing high of 469 basis points in November.
Monti, who completed his first 100 days in office last week, also warned against complacency surrounding a potential Greek default after a series of recent summits as both Italian finance minister and prime minister.
“There have been many moments when I thought this would be a possibility,” Monti said.
Looming Default
The risk of a Greek default loomed this month as the country struggled to put together new austerity measures demanded by European leaders for a second bailout. German Finance Minister Wolfgang Schaeuble compounded the angst after saying on Feb. 14 that Europe is better prepared than it was two years ago for a Greek collapse.
“I don’t believe that anybody could be sure of this because it would be a rather unpredictable scenario and sequence of events,” Monti said. “Better not to do the experiment.”
Euro-area finance ministers will probably officially complete the second Greek rescue package tomorrow, an official told reporters on condition of anonymity.
If leaders “had not come to an agreement on the second package, this might have brought a brutal outcome for Greece,” said Monti. That would have led to “contagion effects flowing to Spain, Italy, in spite of the good progress being made by these countries.”
Economy Overhaul
Monti, who leads an unelected government of non- politicians, has drawn plaudits from investors since taking charge on Nov. 16 amid the country’s worst financial crisis in two decades.
The former European competition commissioner initially moved to shore up Italy’s finances by overhauling the pension system and adopting 20 billion euros of austerity measures to balance Italy’s budget next year. His government is moving to crack down on tax evasion and overhaul rigid labor laws to spur competitiveness and growth in an economy that expanded at an annual average of 0.4 percent in the decade through 2010.
Monti said his government is seeking to “kick start” a cultural change to convince Italians that paying taxes, creating a meritocracy, and promoting competition will sustain growth and help cut the euro-region’s second-biggest debt.
“We will not complete a generational change, that is, a change which normally requires a generation, in 12 or 15 months,” said Monti, whose official residence teems with coat- tailed attendants in bow ties. “But it’s important to kick- start it.”
The premier said that even though the overhaul of Italy will take years, he didn’t expect to be asked to seek a second term after the next elections, due in spring next year.
“If I do with my colleagues in government our job very well, I don’t think it is very likely that I will be asked,” he said.
To contact the reporters on this story: David Tweed in Tokyo at dtweed@bloomberg.net; Andrew Davis in Rome at abdavis@bloomberg.net; John Fraher in London at jfraher@bloomberg.net
To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net
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