Italy offers reform for ECB support | Pakistan Today

Italy offers reform for ECB support

Italy buckled to world pressure in a bid to halt a market rout endangering the global economy, pledging to speed up austerity measures and social reforms in return for European Central Bank help with funding.
About $2.5 trillion has been wiped off world stocks this week on worries the euro zone debt crisis was spreading and the US was slipping into recession. Better than expected US jobs growth in July helped support Wall Street on Friday but stocks slipped back into the red in late trading. After a frantic round of telephone diplomacy, Italian Prime Minister Silvio Berlusconi said his government would bring forward cuts to balance the budget in 2013, a year ahead of schedule, and rush through welfare and labor market reforms. “We consider it appropriate to introduce an acceleration of the measures which we introduced recently in the fiscal planning law to give us the possibility of reaching our objective of balancing the budget early, by 2013 instead of 2014,” Berlusconi told a news conference after a day of calls with world leaders including German Chancellor Angela Merkel and US Treasury Secretary Tim Geithner. Sources close to the matter told Reuters the European Central Bank had demanded such measures in exchange for buying bonds to ease the pressure on Italy, which has come under market attack.
Late in the day, the White House said President Barack Obama had spoken separately with Merkel and French president Nicolas Sarkozy about the eurozone crisis but offered no details of their discussions.
The ECB had no immediate reaction to Italy’s announcement but a European Commission spokesman said the measures responded to assessments set out earlier in the day by EU Economic and Monetary Affairs Commissioner Olli Rehn and “go in the right direction.”
Investors have been unimpressed by a 48 billion euro austerity package passed by Berlusconi’s government, partly because most of the measures were delayed until after elections scheduled for 2013, for clear political reasons.
The crisis was receiving attention at the highest levels as leaders of Germany, France and Spain conferred by telephone during the day. Discord among EU policymakers over how to stop a disastrous spread of the sovereign debt crisis to Italy and Spain, the euro zone’s third and fourth biggest economies, has caused increasing frustration among investors.
The European Central Bank disappointed markets by buying Irish and Portuguese bonds but not government paper in Italy and Spain where bond yields have blown out this week on fears that they may need bailing out. That now appears to have been a gambit to force Italy to act.
“In principle it is right to say that the ECB could start buying Spanish and Italian bonds if they made an extra effort with fiscal and structural reforms,” a senior euro zone official told Reuters.
Bank of Spain governor Jose Manuel Gonazalez-Paramo, a member of the ECB’s governing council, said he expected Spain to announce further measures on August 19 to ensure it meets its budget austerity targets.
Earlier in the day, China and Japan called for coordinated action to avert a new worldwide crisis sourced to Europe and the United States, as did European Economic and Monetary Affairs Commissioner Olli Rehn.
“International policy coordination through the G7 and G20 is of critical importance,” he told a news conference, having broken off his vacation and returned to Brussels. Britain called for a “concerted international effort” to show governments would work together to avert a financial crisis and Brazil also urged unity, saying the world economy was “in a situation of stress.”
The ECB reactivated its dormant bond-buying program on Thursday in an attempt to address the euro zone’s deepening sovereign debt crisis, but only bought Portuguese and Irish debt. Influential members of the ECB opposed even that. Central bank sources told Reuters that four out of 23 ECB governing council members, including powerful German Bundesbank chief Jens Weidmann, voted against the decision to resume any bond purchases. Traders said the central bank intervened for a second day on Friday, but was again only buying Portuguese and Irish paper. Pressure eased on Italian and other peripheral debt but Italy’s 10-year-yields overtook those of Spain for the first time since May 2010 and both yields remained above 6 percent, confirming investors concerns about the lack of action.

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