Italy welcomes U.S. Fed discount rate cut

By Stefano Bernabei

ROME (Reuters) - Italy's economy minister welcomed the U.S. Federal Reserve's cut in a key interest rate on Friday, saying it was timely and in line with "lucid" actions taken by the European Central Bank.

Tommaso Padoa-Schioppa told Reuters in an interview the decision by the Fed to shave half a percentage point off its discount rate governing direct loans to banks to 5.75 percent showed a "more serious evaluation" of the problems stemming from credit market turmoil.

Still, he believed the world economy showed "noteworthy strength." He said it was healthy that world markets were taking a more realistic view of credit risk but warned against becoming excessively cautious.

"Certainly this move by the Fed reflects a more serious evaluation of the problem that should be addressed, but it is also a timely move and a move that gives faith to the markets," Padoa-Schioppa said, speaking by telephone while on holiday.

"One must take into account that both the world economy and the economy of the United States have a noteworthy strength that nobody questions, and that the system of monitoring risks ... is operating effectively," he said.

Padoa-Schioppa said he could not rule out the possibility of a special G7 meeting to evaluate the market turmoil. At the same time, he said that he believed the European institutions were working properly already.

"If you ask me, the response by central banks, including the (European Central Bank) where I spent seven years in Frankfurt, has been impeccable," said Padoa-Schioppa, who was formerly on the European Central Bank board.

He also dismissed a letter by French President Nicolas Sarkozy, in which the French leader urged the G7 to consider steps to improve market transparency. The letter was sent to German Chancellor Angela Merkel, and released by Sarkozy's office.

"This seems to be a gesture directed at public opinion," Padoa-Schioppa said.

"The coordination mechanisms are working, there are committees, the Eurogroup, the ECB ... all of these bodies are not sleeping, they don't need a public letter for them to function."

Turning to the Italian economy, Padoa-Schioppa said he did not forecast any change in fiscal policy as a result of the market troubles - or foresee any changes to the government's current economic growth forecast of 2 percent in 2007.

Italy's government is looking to bring the budget deficit below EU limits for the first time since 2002.

Padoa-Schioppa said that fiscal discipline becomes especially important because of Italy' enormous debt, worth more than gross domestic product, and economic growth that lags its European peers.

"There's an Italian vulnerability, including that stemming from the level of public debt," he said.

"So for me, the underlying imperatives of strengthening growth and continuing the path of fiscal reform do not change. Instead, they become even more necessary."