UPDATE 2-Italy's Monti says serious worry Sicily region may default
By James Mackenzie and Lisa Jucca
ROME/MILAN, July 17 (Reuters) - Italian Prime Minister Mario Monti expressed serious concern on Tuesday over a possible default by Sicily, an autonomous region long criticised for its wasteful public administration and bloated government payroll.
Monti said in a statement there were "grave concerns" that the southern island could default and he said he had written to the governor Raffaele Lombardo seeking confirmation that he would resign by the end of the month.
The highly unusual intervention from the prime minister underscored the gravity of the situation in Sicily, which accounts for around 5.5 percent of Italy's gross domestic product and which has an unemployment rate of 19.5 percent, almost twice the national level.
After a decade of steady deterioration in its finances, the island has some 5.3 billion euros in debt, a record of waste and inefficiency and an outsized public service that critics say is used by local politicians to buy votes.
Monti said that if the government in Rome is to help bail out Sicily, he would have to take account of the situation of the regional government. He is due to meet Lombardo on July 24.
Sicilian authorities have been severely criticised by the Corte dei Conti, Italy's main public finance audit body, which warned last month that its chronically strained public finances were in a position of "difficult sustainability".
Despite its debt burden, the region still took on thousands of new staff last year, increasing the number of permanent regional employees by more than 30 percent to 17,218.
Of these 1,905 or about 11 percent of the total were in management positions, around double the ratio of other regions.
The Corte dei Conti said in its report on the 2011 accounts that the region's hiring procedure "could not fail to give rise to some perplexity".
NO IMMINENT THREAT
Despite the worry over its finances, Sicily is not expected to pose a major threat to Italy's overall public finances and credit agency Fitch said it saw no immediate risk it would fail to meet its commitments.
"As far as we know, the region of Sicily is not in the best of financial conditions. But it's not on the verge of an imminent default on its loans and bonds," said Raffaele Carnevale, Senior Director for International Public Finance.
Fitch rates Sicily BBB+ with negative outlook, one notch below Italy's sovereign debt rating. The debt of Sicily and other local authorities amount to around 115 billion euros, contributing to Italy's huge 2 trillion euro public debt.
A government source told Reuters on Tuesday that Monti had used the warning of a default to raise pressure on Sicilian authorities to cut spending, and in reality the government sees little risk of a default actually occurring.
"It's clear that there is no risk of default. Monti used the word default to pile on the pressure...the government wants significant cuts to wasteful and excessive spending," the source said.
Sicily's governor Lombardo said in a statement later on Tuesday that he had spoken to Monti by phone and reassured him over the sustainability of the region's finances. He also confirmed he would resign.
Monti's comments earlier sent the prices of safe haven German Bunds higher as jittery markets absorbed the latest signs of strain in the euro zone's third largest economy, which has returned firmly to the forefront of the euro zone debt crisis.
Borrowing costs on its benchmark 10 year debt are above 6 percent and the risk premium or spread over German Bunds is almost 480 basis points.
Monti's technocrat government hiked taxes sharply when he came to power last year in the middle of one of the most severe episodes of the crisis but he has since moved to cut public spending.
The government has announced 24 billion euros in cuts over three years but it faces a tough battle cutting some major areas of expenditure including health, which is largely under the control of regional authorities.
The Corte dei Conti noted that Sicily's tax estimates had been "excessively optimistic" and had fallen by almost 12 percent from the previous year as the recession bit.
In other areas, health spending, one of the main responsibilities of the regional governments, rose more than 7 percent last year to 9.4 billion euros.
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