Developments in the Eurozone

Updated On: Nov 14, 2011

Monti named Italy’s interim Prime Minister after Berlusconi’s resignation

After the passage of the economic package by the Italian parliament on Saturday, Mr Berlusconi resigned as he had promised after he failed to obtain a majority in a crucial vote on Tuesday, but said that his resignation is not a sign that he is leaving the Italian political scene, and called on the European Central Bank (ECB) to be a lender of last resort to save the euro.

In a video message broadcast addressed to the Italian nation, Mr Berlusconi said, “For those who say I am leaving the scene, I want to make it perfectly clear that tomorrow I will re-double my efforts in parliament to renew Italy.”

He also added that agreeing to support a government led by former European Union Competition Commissioner Mario Monti was an act of responsibility.

Report: Italy parliament vote opens way for Berlusconi resignation (Reuters, 12 Nov 2011)

Report: Berlusconi Not Leaving Politics, Urges Strong ECB (Bloomberg, 14 Nov 2011)

Mr Monti, a former EU Commissioner considered to be a clinical-minded economist, was named interim prime minister of Italy, effectively charging him with the task of uniting Italy’s quarrelling political parties behind a new transitional government and keeping the country from being pulled further into Europe’s debt crisis. Most parties, including Mr Berlusconi's People of Liberty Party, approved his nomination. EU leaders also approved Mr Monti's appointment and vowed to monitor Italy's austerity measures.

Mr Monti has promised to be a steady hand during the current financial crisis, and said he expected to move ahead as soon as he secured a parliamentary majority for the new government, an urgently critical task.

Last week, the tumultuous political situation drove the effective yields on Italy’s bonds to 7.4%. If Italy is forced to continue paying such high rates to borrow, it will strain its management of its debt, which is among the highest in Europe. Italy must repay or refinance almost €200 billion, about US$276 billion, worth of maturing bonds by April 2012.

Italian president Giorgio Napolitano gave a hard-hitting speech on Sunday aimed at reassuring investors about Italy’s commitment to the euro and warning the nation’s political class about the risks of further political fallout, calling on lawmakers to form a broad coalition to support of Mr Monti.

Mr Monti is well respected among European political and business leaders as a credible figure in economics. He has spoken extensively about Italy’s pressing need to introduce greater competition and other measures to revive its stagnant economy. He was selected to be interim prime minister because he seemed to have no long-term political ambitions and was not beholden to any of Italy’s party leaders.

News media reports indicate that Mr Monti at first sought to include figures from the major parties in his cabinet in order to share the political cost of the government’s program. But few were willing to join it, even though they voiced support for the coalition. The new cabinet is now expected to consist mainly of technical experts rather than politicians.

However, his status as an outsider in Italy’s personality-driven politics was both an advantage as well as an obstacle. On Sunday, Angelino Alfano, the newly-appointed chief and of Berlusconi’s party, said the party would back Monti only if a list of conditions was met. Mr Monti also faces the toughest resistance from Italy’s right wing, as the conservative Northern League, Mr Berlusconi’s main coalition ally, which has refused to back Mr Monti, instead calling for snap elections.

Report: With Clock Ticking, an Economist Accepts a Mandate to Rescue Italy (New York Times, 13 Nov 2011)

Report: Mario Monti named Italy’s interim prime minister after Silvio Berlusconi resigns(Washington Post, 14 Nov 2011)

Report: Italy crisis – Mario Monti appointed new PM-designate (BBC, 13 Nov 2011)

New Greek prime minister to face cabinet vote, troika inspectors

Meanwhile, the IMF and European leaders will maintain pressure on Greece's new prime minister, Lucas Papademos, to implement radical reform to prevent bankruptcy. Mr Papademos, a former central banker who oversaw his country's entry to the euro zone in 2002, faces a confidence vote in his cabinet on Wednesday before meeting euro zone finance ministers in Brussels on Thursday, according to state television.

While Sunday’s newspapers published polls in Sunday's newspapers show that three in four Greeks support Mr Papademos, he will face his first protest in front of parliament on Monday afternoon from left-wing demonstrators who accuse the new government of working in the interests of the banks.

At the same time officials from the "troika" (the International Monetary Fund, European Central Bank and European Union) are due to start arriving in Athens on Monday to examine whether Greece qualifies for a second bailout worth €130 billion euros (US$180 billion) and an €8 billion tranche from the earlier bailout, needed to finance bond payments due at the end of the year, according to Reuters data.

Report: New Italian, Greek governments race to limit damage (Reuters, 13 Nov 2011)

German Chancellor calls for closer European political union

In Germany, Chancellor Angela Merkel said that the time has come to move toward closer political union in Europe to send a message to holders of government bonds that euro-area leaders are serious about ending the sovereign debt crisis.

Speaking on the eve of her Christian Democratic Union party’s annual congress in the eastern German city of Leipzig, Ms Merkel said that she wants to preserve the euro with all current 17 members. She said in an interview with ZDF television late yesterday, “I believe this is important for those who buy government bonds: that we make it clear that we want more Europe step by step, that is that the European Union, and the euro area in particular, grows together.”

Report: Merkel: EU Must Move Toward Closer Union (Bloomberg, 14 Nov 2011)

Outlook on France

Meanwhile, investors are increasingly concerned about France’s outlook, whose banks are among the world’s largest and are tightly linked with their US counterparts.

The difference between what French pays to borrow and what Germany pays has doubled since the beginning of October, and last week reached its widest point since the establishment of the euro currency zone. At the same time, speculation that France could lose its triple-A rating on sovereign debt increased after Standard & Poor’s told its clients by mistake on Thursday that it was downgrading France’s debt.

Amid Italy’s political change, French politicians, regulators and bankers insist that Italy’s problems are in check, and will not affect French banks, which have slashed their holdings of Italian sovereign debt in the last few months. Nonetheless, among European financial institutions, French ones have been the most exposed to Italy, according to a recent report by Keefe, Bruyette & Woods. French officials also acknowledge behind closed doors that French banks hold far more in Italian debt than they ever held in Greek government bonds. This makes a write-down in the value of Italy’s debt much more damaging on bank capital levels than the 50% reduction in Greek debt value agreed by European leaders last month.

Senior bank analyst with Keefe, Bruyette & Woods, Jean-Pierre Lambert, added that “if Italy deteriorates dramatically, some French banks would be engulfed in the contagion and that would require capital support from the state.”

Nevertheless, France’s is in a much better state than Italy’s. France’s debt-to-GDP ratio stands at 85%, compared to Italy’s 120%. France’s economy also grew at double the rate of Italy’s over the last decade.

French authorities have been keenly watching developments in Italy, but maintain that French banks have enough capital to weather the crisis, and expect European leaders and the new Italian government to keep the crisis from escalating.

Analysis: France Keeps a Watchful Eye on Financial Turmoil in Italy (New York Times, 13 Nov 2011)

Stock markets and Euro rises on hopes on positive developments in Europe

In the stock markets, Asian stocks and the euro rose on Monday on hopes that new leaders in Italy and Greece will take decisive action to save their countries’ debt crises and prevent a wider financial meltdown in the euro zone.

Japan's Nikkei share average rose 1.5%, while MSCI's broadest index of Asia Pacific shares outside Japan rose 0.8%. The euro traded around $1.3770, up about 0.2%.

Traders cautioned that the market's continued rise depends on how Italy's planned sale of 3 billion euros of five-year bonds on Monday is received by the market. While bond Italian yields have come off their peaks they remained elevated. Analysts fear that the Italian government’s possible inability to fund itself could be a systemic risk given the size of its economy and its status as the world's third-largest government debtor.

Report: Stocks, euro rise on hopes of progress in Europe (Reuters, 13 Nov 2011)

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