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Italy takes more sombre economic line

March 5, 2009

By Guy Dinmore in Rome

Published on FT: March 5 2009

Italy’s government is abandoning its optimistic rhetoric for a more sombre assessment of the economy following a slew of poor data. Giulio Tremonti, the finance minister, told a conference on Thursday that 2009 would be “even more difficult” than last year, a spokeswoman said. The websites of two leading newspapers quoted him as saying Italy faced a “horrible year”, but officials did not confirm that.

Mr Tremonti said the government would look next week at providing more to help the growing numbers of unemployed, on top of €8bn ($10bn, £7.1bn) it says has already been set aside for extra benefits.

A senior official of the Bank of Italy said on Wednesday that the 1.8 per cent contraction in the last quarter of 2008 pointed to a fall in gross domestic product of 2.6 per cent this year. The central bank, which had previously forecast a 2 per cent contraction, later sought to calm nerves by saying the remarks were not an official projection.

Italy, Europe’s fourth largest economy, entered recession earlier than other big regional economies last year. Data this week confirmed that GDP fell 1 per cent in 2008. It is the only leading country forecast by the International Monetary Fund to be facing three consecutive years of contraction.

In his public statements Silvio Berlusconi, prime minister and one of Italy’s richest men, still tries to inject a sense of confidence but no longer urges Italians to buy shares in part government-owned companies such as Eni and Enel. He continues to insist, however, that Italian banks are solid while assuring savers they will not lose a cent.

Economists warn that the crisis is going to hit Italy in reverse order, with the slump in the real economy threatening to drive banks into trouble. Mr Tremonti is under pressure from fellow cabinet members to increase government spending further, but insists his hands are tied by Italy’s huge public debt, the world’s third highest.

Mr Tremonti admitted at the meeting of banks, companies and unions that Italy had seen a greater tightening of credit market conditions than in other eurozone economies. This had been bad in 2007 and worsened after September last year, he said, addressing the main concern of Italian businesses.

The minister said Italian banks had shown a “strong interest” in taking up a government-backed bond offer totalling up to €12bn and rejected criticism that the 8.5 per cent interest rate was too high. Mr Berlusconi on Sunday said only one bank had shown interest.

Mr Tremonti also said the government would act to “unblock” more than €100bn stuck by “an excess of bureaucracy” in the Italian system.

He said the public administration was in debt to companies to the tune of €30bn, but that the government had problems in verifying figures in some regions.

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