July 8, 2011 / 6:26 PM / 6 years ago

Analysis - Tremonti exit would spell big trouble for Italy

ROME (Reuters) - Speculation is growing that Italy’s Economy Minister Giulio Tremonti -- credited with shielding the country from the euro zone debt crisis -- will soon be forced out of government, which would further raise the heat on Italian bonds.

Italian Finance Minister Giulio Tremonti leads a news conference at Chigi palace in Rome June 30, 2011. REUTERS/Remo Casilli

The yield differential on Italian 10-year bonds versus safer German bunds hit its widest since the launch of the euro on Friday, as the markets worried about contagion from the Greek debt crisis.

Tremonti overcame cabinet resistance to push through a tough austerity programme last week, but now looks increasingly isolated and appears to no longer have the full support of Prime Minister Silvio Berlusconi.

“He thinks he’s a genius and everyone else is stupid,” Berlusconi said in an interview with Repubblica daily on Friday.

“He is the only minister who is not a team player,” Berlusconi said, adding that he would make sure the austerity package was changed during its passage through parliament to make it more attractive to voters rather than markets.

It seems questionable whether the package is even that attractive to markets, however. It was not formally presented until a week after it was approved by the cabinet, and it has been marred by confusion over the measures it contains and how much they are worth.

The premium investors demand to hold Italian 10-year bonds instead of safer German bunds jumped to 2.24 percent from 1.99 percent on Friday. The Italian yield of 5.3 percent is the highest since 2002.

Yet analysts have no doubt the picture would be even worse without Tremonti, who has many critics but whose insistence on keeping a lid on the fiscal deficit is widely seen as having so far shielded Italy from the worst of the euro zone debt crisis.

“There’s already growing market focus on whether Italy can bring down its debt and if you add uncertainty about Tremonti being pushed out you get a very dangerous mix,” said Raj Badiani of IHS Global Insight.

“It would be a really negative step that would make ratings agencies and markets very nervous.”

Badiani said Tremonti’s exit might change the “pecking order” of possible contagion from the euro zone debt crisis and soon see Italy looking as vulnerable as Spain.

Tremonti, a former tax lawyer with no economic background, is an abrasive character who makes enemies easily. At Berlusconi’s side since his first government in 1994, he boasts that only he has the courage to say no to the prime minister.

According to newspapers he often threatens to resign when faced with opposition, betting that his standing with markets and his close ties to the pro-devolution Northern League, Berlusconi’s key coalition ally, make him indispensable.

Yet that may no longer be the case. The League, hit by election setbacks and falling support, has begun distancing itself from Tremonti, while Berlusconi seems to have finally tired of defending him from his many cabinet critics.

Tremonti is seen as electoral poison by most of the cabinet, who blame his spending curbs and refusal to lower taxes for the government’s loss of popularity.


A meeting between Tremonti and Berlusconi on Friday ended with Berlusconi issuing a statement reiterating his commitment to balance Italy’s budget, but offering no explicit support to his minister as he often has before in moments of tension.

One factor in Tremonti’s favour is the lack of any obvious rival for what now looks like an unattractive job proposal for any well-qualified candidate. The government is unpopular and its term of office ends in 2013.

“There is no clear candidate to replace Tremonti,” said Fabio Fois of Barclays Capital. “In the interests of the country I think it is best if he stays where he is.”

The current situation has similarities with Berlusconi’s previous government, when Tremonti was briefly forced out by coalition infighting in 2004.

On that occasion he was replaced by his number two, Treasury Director General Domenico Siniscalco, and markets would hope for a similar outcome if he were to quit or be sacked again.

Vittorio Grilli, the current Treasury chief, would be seen as guaranteeing continuity with Tremonti’s tough fiscal line, yet it remains to be seen if he would want the job.

“Grilli has all the credentials to be finance minister from a technical point of view,” said Fois, though he questioned whether Berlusconi would want to replace Tremonti with someone so closely associated with his policies.

Grilli, who heads the EU’s influential Economic and Financial Committee, has spent his whole career as a Treasury technocrat with governments of both political persuasions.

He is a candidate to replace Mario Draghi as governor of the Bank of Italy and he may not want to lose his bi-partisan appeal by throwing in his lot with Berlusconi just as the media magnate appears in irreversible political decline.

The same reasoning applies to Lorenzo Bini Smaghi, Italy’s board member at the European Central Bank, another well-qualified technocrat who has been touted in the press as a possible successor to Tremonti.

Bini Smaghi is expected to quit his ECB post soon and is another candidate for the BOI job, which he is likely to find far more appealing than being economy minister in a cabinet that would resist the rigour he has always preached for Italy.

As a result, if indeed Tremonti is forced out, he looks more likely to be replaced by a far weaker figure put in place to open the purse strings to give Berlusconi some chance of winning the next election -- a prospect that would frighten financial markets.

Editing by Hugh Lawson

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