Political dysfunction fuels Italy financial crisis

COLLEEN BARRY - AP Business Writer
AP
FILE - In this Friday, Aug. 5, 2011 file photo, Italian Premier Silvio Berlusconi, right, and Finance Minister Giulio Tremonti meet  journalists in Rome's Palazzo Chigi government headquarters. The two leaders charged with navigating Italy through one of the worst financial crises in its history are politically weakened, and the government they lead is increasingly fragile. Never was this more clear than last week, when Premier Silvio Berlusconi and Finance Minister Giulio Tremonti, looking like chastened school boys, announced Italy would balance its budget a year earlier than previously announced, after receiving detailed instructions from the European Central Bank. (AP Photo/Andrew Medichini, File)
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FILE - In this Friday, Aug. 5, 2011 file photo, Italian Premier Silvio Berlusconi, right, and Finance Minister Giulio Tremonti meet journalists in Rome's Palazzo Chigi government headquarters. The two leaders charged with navigating Italy through one of the worst financial crises in its history are politically weakened, and the government they lead is increasingly fragile. Never was this more clear than last week, when Premier Silvio Berlusconi and Finance Minister Giulio Tremonti, looking like chastened school boys, announced Italy would balance its budget a year earlier than previously announced, after receiving detailed instructions from the European Central Bank. (AP Photo/Andrew Medichini, File)

MILAN (AP) — As international anxiety mounted this summer over Italy's staggering national debt, Prime Minister Silvio Berlusconi and his finance minister were embroiled in their own troubles.

Berlusconi was weakened by electoral defeats, government infighting, criminal trials and a huge court ruling against his family's investment business over corruption in a 20-year-old business deal. Finance Minister Giulio Tremonti was tarnished by revelations that he paid for a Rome apartment in cash — a red flag for tax evasion in Italy.

Berlusconi stayed virtually silent as uncertainty roiled Italy's stock market and the cost of borrowing rose to dangerous levels. He said at one point he was keeping mum because he didn't want his personal issues to agitate the markets. Meanwhile, a weakened Tremonti appeared unable to push through necessary reforms.

Finally, the two men were forced last week to announce a pledge to balance the budget in 2013, a year earlier than planned, in exchange for a massive European Central Bank program to drive down interest rates on Italian bonds by buying them on the open market.

The government says it wants broad social consensus on the inevitable sacrifices triggered by austerity rigorous enough to placate the ECB.

But the union leaders and industrialists emerging from a meeting with Berlusconi and Tremonti in Rome on Wednesday night said it left them clueless about the government's plans.

Emma Marcegaglia, head of the influential industrialists lobby Confindustria, also told reporters that union and business leaders at the meeting urged the government to act "quickly and well" to devise a "rigorous and fair" plan. Participants said the Berlusconi's Cabinet would meet on Aug. 16 or 18 to approve urgent measures.

The government made no immediate comment on the meeting. Tremonti was to address lawmakers Thursday about the government's strategy.

Italy's history of managing its high national debt has long kept market anxieties at bay and borrowing costs down. The country's slide to the brink of economic disaster this month has been a dramatic illustration, experts say, that political dysfunction and the shortcomings of Italy's scandal-tainted leaders are fueling its crisis as much as fundamental economic weakness.

"It is a question of credibility. The markets feel this government is not credible," said Roberto D'Alimonte, a political science professor at Rome's LUISS University.

The perception is growing, even among Berlusconi's base, analysts say, that he is more preoccupied with his own personal problems — which include a trial for allegedly having paid for sex with an underage teen. Both he and the Moroccan teen, who was 17 during the period that she acknowledges meeting Berlusconi, deny having had sex.

International hopes came to rest on Tremonti, widely lauded as the figure who had helped Italy survive the 2008 financial crisis by keeping a tight rein on spending

But the former accountant-turned-politician has been politically weakened by a corruption scandal involving an aide, followed by revelations that he was paying cash for his share of an apartment that he and the aide used as a Rome pied-a-terre. Tremonti is not the subject of any criminal probe, and he has acknowledged that he should have handled his housing arrangements better.

But the scandal, along with public criticism from Berlusconi, fueled speculation that Tremonti would soon be leaving his post — lending turbulence to markets that needed reassurance.

Tremonti's image wasn't helped when he was caught on camera calling another minister "an idiot" during a government press conference outlining the first round of austerity measures in July.

Tremonti has shaken off the rumors — and members of Berlusconi's government have voiced their support. But he is no longer seen as above reproach — and he may have lost the political clout to hold a firm line on spending with other members of the Cabinet, which was "his main merit," said D'Alimonte.

"The fact that he paid for rent in cash is not a good thing," D'Alimonte said. "The basic question I have, and many Italians have, is why a wealthy man like Mr. Tremonti could not afford to rent an apartment in Rome on his own. ... His image is tarnished."

Meanwhile, Italy's debt level is nearing 120 percent of GDP and growth is expected to be only around 1 percent this year. Rising borrowing costs increase the weight of the debt — now at 1.8 trillion euros ($2.59 trillion dollars)— every year.

The Italian Treasury saw borrowing costs drop sharply in its latest bond sale Wednesday, in a reassuring sign for the country that the financial pressures may be easing in the wake of the European Central Bank's decision to buy its bonds — a quid pro quo for the pledge to accelerate the austerity measures and propose new structural reforms. It is not clear, however, what will happen when ECB support is withdrawn.

"What we expect is that the governments do what we consider to be their job," ECB chief Claude Trichet said in an interview with French radio Europe 1 on Tuesday. "We've asked very clearly in recent days the Italian government to take a certain number of decisions, which were taken, and in particular to accelerate their return to a normal budgetary policy."

If borrowing costs cannot be contained, refinancing the debt could become too costly for Italy, risking default — a situation the euro zone desperately wants to avoid.

Economists are concerned that austerity measures — which dampen growth — alone won't break the cycle — that what is needed are measures that encourage investment to expand the GDP.

Analysts see this as one of the most challenging periods since the summer of 1992, when Italy abandoned the European currency system and allowed the lira's value to be dictated by market forces during a period of intense currency speculation.

"The market lost trust because they saw that the political class in Italy on its own wasn't capable of managing the crisis," said Marco Valli, chief European economist at Italy's Unicredit.

While Berlusconi accelerated measures under direct ECB pressure, Valli said the government needs to act as soon as possible on more structural reforms.

"Before September, they need to give the market some indication of where they are going," Valli said.

Possible measures include labor market liberalization and reducing the cost of bureaucracy, including the number of official cars and abolishing provincial administrations — measures announced previously but that disappeared when the austerity plan was passed by parliament in July.

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AP Business Writer Greg Keller contributed from Paris and AP correspondent Frances D'Emilio contributed from Rome.

(This version corrects bytitle.)