Italy cannot mould policy only to suit markets-formin

ROME Mon Dec 12, 2011 12:53pm EST

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ROME Dec 12 (Reuters) - Italy is sensitive to financial market movements, but it cannot adjust policy every time there is a negative reaction among investors, Foreign Minister Giulio Terzi said on Monday.

He was reacting to the failure of a European summit deal last week to restore market confidence, forcing the European Central Bank on Monday to step in to hold down bond yields in vulnerable countries such as Italy.

Terzi, foreign minister in Mario Monti's new technocrat government, said the summit deal last Friday was "a significant step forward to resolve both the immediate problems of imbalances on the financial markets and the long- and medium-term question of finding a complete governance mechanism in the euro zone."

Talking to foreign journalists, Terzi acknowledged that the summit, which agreed to strengthen euro zone budget discipline, had not impressed the markets.

"But if it depended only on that, we would have had the European treaty written in London or Wall Street," Terzi said.

He added that the objective of the summit was to find credible macro-economic instruments to resolve the euro zone's perilous debt crisis and to agree on a way to move towards a new fiscal pact. "In this sense it was a success," he said.

"Let's hope the markets understand. If they do not understand, of course there is a problem of communication. But we cannot cut tens of billions of spending every time the spread goes up a point or goes down a point," he added.

Borrowing costs for Italy and Spain, the euro zone's third and fourth economies, rose on Monday and the spread or gap between their bond yields and safe-haven German bunds widened as markets remained unconvinced by Friday's deal.

Traders said the ECB had stepped in to buy Italian debt after yields rose.

Yields on Italy's 5-year bonds rose past 7 percent on Monday and 10-year yields came close to the same level, which was the point at which Greece, Ireland and Portugal were forced to take financial bailouts.

The euro zone crisis has escalated since Italy moved into focus in July because of its massive debt and stagnant growth. Bailing out Italy would overwhelm Europe's current defences.

Terzi is a member of a technocrat government appointed in November under respected economist Monti after previous Prime Minister Silvio Berlusconi lost the confidence of markets because of his repeated failure to implement economic reforms.

Monti's tough austerity programme to face the crisis has impressed analysts and investors, but much of Italy's fate remains out of its hands, dependent on market perception of whether the euro zone can agree a viable strategy to overcome the wider crisis.

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