Italy won't need bailout if it sticks to budget plan: Schaeuble

TAMPERE, Finland Mon Nov 7, 2011 8:53am EST

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TAMPERE, Finland (Reuters) - German Finance Minister Wolfgang Schaeuble said on Monday that Italy would not need a bailout if it sticks to its budget plans, but he also warned that the euro zone's third-largest economy was too big for the region's emergency fund to support.

Italian government bond yields hit 14-year highs on Monday, rising nearer levels widely seen as unsustainable as political turmoil threatened to drag it deeper into the regional debt crisis that has already engulfed Greece, Ireland and Portugal.

But Schaeuble said Italy's request to be monitored by European officials and the International Monetary Fund meant it should not need to ask for external help.

"Italy has to stick to what has been announced. If Italy will deliver, will reduce its debt, there is no problem," he told reporters after giving a speech in Tampere, Finland.

He also said Italy was too big to be rescued by the European Financial Stability Facility.

Finnish Prime Minister Jyrki Katainen told Reuters at the same event that Italy's debt premium should decline with the IMF and EU monitoring its reforms, noting that the premium for Spain had eased in the last few months after the country took steps to improve its finances.

"We are expecting the same for Italy," he said.

"It is crucial that the two bodies verify what the Italian government is doing."

Schaeuble urged the region's indebted countries to cut deficits and restore market confidence, saying large deficits cancel out the brief benefits of short-term spending measures.

"That's why immediate fiscal structural reforms in highly indebted countries are of the essence," he said. "There is a trade-off between short-term pain and long-term gain."

The two were speaking as Greece, which faces default without further international funds in December, races to pick a new leader to see through its latest bailout plan. European leaders fear that allowing Greece to fall into bankruptcy could trigger a full-blown crisis that could swallow up much larger economies like Italy and Spain.

Katainen said he was pro-European and supports further enlargement of the EU, but only when the region is ready.

"It is not very pro-European to go forward... (for) further integration before we are ready for it. If we overlook the obvious problems, do not obey the rules and do not respect the treaties, the overlooked problems do not go away," he said.

Katainen, speaking about the factors leading to the current crisis, said the price of debt had been far too low compared to the economic performance of many countries.

"This very real risk of default hasn't been reflected in pricing of the debt of the euro zone member states," he said, adding that policymakers have taken measures to ensure risk is priced by markets.

(Writing by Jussi Rosendahl; Editing by Hugh Lawson)

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