* Interest at record high
* Monti caught between markets and domestic opposition
* Union leader says country risks social explosion
By Barry Moody and Gavin Jones
ROME, Dec 14 (Reuters) - Italy’s borrowing costs rose to a record on Wednesday as neither last week’s European summit nor tough new austerity measures by the government of Mario Monti succeeded in restoring market confidence.
Domestic opposition to Monti’s austerity programme is increasing and markets are refusing to reduce the pressure on Italy, whose fate is at the core of the euro zone crisis.
Italy had to pay 6.47 percent on five year bonds in an auction on Wednesday, up from a previous euro era record high of 6.29 percent in mid November.
Adding to the pressure, Italy’s top union leader told Reuters that Monti’s policies could cause a social explosion and it might be better for the country if he did not remain in power until the scheduled end of the legislature in 2013.
Yields on the secondary market on Italy’s benchmark 10-year paper went above 7 percent, the level at which Greece, Ireland and Portugal were forced to take bailouts.
Europe could not handle such a rescue for the much bigger Italian economy, whose debt amounts to 120 percent of gross domestic product.
The euro zone’s third-largest economy needs to raise 440 billion euros on the markets next year - with 160 billion euros of debt due by April - and interest at these levels is unsustainable.
Bank of Italy governor Ignazio Visco said last week that borrowing costs must fall to around 5 per cent to become manageable.
The European summit’s decision last week to strengthen budget discipline dashed markets’ expectations of urgent and decisive action and investors are now jittery over threatened downgrades from ratings agency Standard and Poor’s on euro zone economies - a move that would deepen the crisis by making borrowing more difficult.
BLEEDING WON‘T STOP
Worse for Monti is that his mix of spending cuts and tax increases has failed to stop the bleeding despite the widespread relief in Europe when his technocrat government replaced the discredited Silvio Berlusconi last month.
Monti’s popularity remains high with a public that seems convinced that only painful austerity can save the country, but there are growing signs of opposition and political obstruction, while continuing high interest rates would undermine the whole reason his government was rushed into power.
Monti was repeatedly heckled by senators from the opposition Northern League protesting against his economic programme on Wednesday when he reported to the upper house on the EU summit.
The Senate speaker had to suspend the session for about 10 minutes when they refused to stop shouting or lower placards reading “This is not a budget but a hold-up”.
Susanna Camusso, head of Italy’s biggest trade union confederation, the CGIL, told Reuters that concessions made by Monti on his programme were insufficient and her movement would continue protests which have seen a series of short strikes this week.
Echoing criticism by some commentators, Camusso said the government was “deeply conditioned” by its need for support from Berlusconi’s PDL party, the biggest in parliament. She said Monti’s plan spared the rich and forced excessive sacrifices on ordinary Italians.
Leftwing commentators have alleged that Monti’s government is not a true technocrat administration but is protecting right-wing interests and the establishment by failing to take tough measures against rampant tax evasion and not imposing a wealth tax.
Monti is dependent on broad cross-party support from left and right in parliament and politicians have pressured him to make changes to his austerity decree to protect their supporters. Around 1,400 amendments were proposed in parliament.
As a result of this pressure and accusations that his manoeuvre is unfair to the underprivileged, Monti told parliament on Tuesday that he would sweeten the bill to help poorer families and pensioners. He said the changes would make the programme “more equitable”.
The government has left open the possibility of seeking a confidence vote to ensure final approval of the decree by its deadline of Christmas and avoid “sniping” by party malcontents.
Camusso said Monti had not done enough. “It would be absolutely excessive to say we are satisfied, the solutions are insufficient,” she said in an interview.
The wide public resignation to austerity measures has prevented any significant drop in Monti’s popularity which remains close to 60 percent, but this could change as the measures bite.
Monti said investors would be impressed by Italy’s sacrifices but it would take time for this to have an effect. “I am confident markets will react positively to Italy’s efforts, even if not today or tomorrow,” he told parliament on Tuesday.
Monti acknowledged that higher taxes and spending cuts would have an impact on growth, but falling interest on Italy’s debt would have an anti-recessionary effect.
Commentators have criticised Monti for being in thrall to the parties that support him in parliament and easing up on planned liberalisation measures. Concessions have been made to special interest lobbies like the powerful taxi drivers and pharmacy owners.
“In the government you can detect clearly the fear that political forces could increase their pressure on Monti and that economic difficulties stemming from the international financial crisis could increase discontent,” said Massimo Franco, a respected commentator for Corriere della Sera newspaper.