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Italian government ‘worried’ by market turmoil

December 1, 2010

By Guy Dinmore in Rome, Published: November 30 2010

Italy’s centre-right government on Tuesday expressed worries over turmoil on international debt markets, as new data showed unemployment rising and thousands of protesting students paralysed central Rome.

Silvio Berlusconi, prime minister, told cabinet colleagues the spread between Italian 10-year bonds and the German equivalent had risen to a record 210 basis points.

Gianni Letta, cabinet undersecretary, said he was worried that markets were trying to “spread the contagion from Ireland to more solid countries such as Spain and Portugal, and maybe even Italy”. He did not know how much longer the government, facing a confidence vote in parliament on December 14, would last.

The comments from Mr Letta – sometimes named in the media as a possible caretaker successor to Mr Berlusconi – amounted to the first official admission in public that Italy was at risk of contagion.

It was the first time the cost of Italian borrowing had risen more than 2 percentage points over Germany’s since 1997.

The ABI banking group blamed market speculation, arguing the public finances and banks were solid. Luigi Casero, Treasury undersecretary, also sought to calm markets, saying Italy did not need further austerity measures to meet budget deficit targets.

His comments followed a European Commission forecast that Italy’s budget deficit would fall to 4.3 per cent in 2011 against a government target of 3.9 per cent in 2011 and 5 per cent at end-2010.

In spite of government assurances that Italy is emerging from its worst postwar recession, figures released on Tuesday show that the jobless rate rose to 8.6 per cent from 8.3 per cent a month earlier.

Giorgio Squinzi of the Confindustria business group said the fall of the government would not have a significant impact on Italy’s finances.

Oliviero Roggi, professor of corporate finance at the University of Florence, believes markets have discounted political instability, but fears that market speculation will intensify, driving up Italy’s borrowing costs.

The opposition has promised to see the 2011 budget through parliament before the confidence vote.

Adding to the sense of disarray, thousands of students protesting at planned education cuts brought central Rome to a standstill, throwing eggs and flour at riot police at parliament.

Mr Berlusconi was quoted as telling the students to go and study but they went on to block Rome’s main railway station instead.

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