Trichet's letter to Rome published, urged cuts

MILAN (Reuters) - The European Central Bank demanded sweeping reforms and fiscal tightening measures from Italy in August before it stepped into the market to ease mounting pressure on Italian bonds, a letter published in the Corriere della Sera on Thursday showed.

The existence and outline of the letter from ECB President Jean-Claude Trichet and his designated successor, Bank of Italy Governor Mario Draghi, has been acknowledged but not so far been made public by the authorities.

The ECB declined to comment on the letter on Thursday.

In unusually clear and explicit language, Trichet and Draghi urged Prime Minister Silvio Berlusconi to make deep reforms including opening up public services, overhauling rules on wage bargaining and hiring and firing, and toughening deficit cuts.

It said the government should aim to bring the deficit down to 1 percent of gross domestic product by 2012 and balance the budget by 2013, a year ahead of schedule, “mainly via expenditure cuts.”

“We trust the Government will take all the appropriate actions,” it ends.

After several weeks of wrangling, Berlusconi’s center-right government passed a 60 billion euro austerity package earlier this month which contains some of the steps outlined in the letter, although the erratic manner in which it was agreed drew widespread criticism.

The government says it is on course to balance the budget by 2013 but expects a deficit of 1.6 percent by 2012, well above the 1 percent target in the letter, while most of the reduction has come through higher taxes.

Other measures requested by the euro zone’s central bank, including pension reforms, cuts to public sector wages and new hiring and dismissal rules have either not been implemented or only partially addressed.

Trichet has denied there was any direct deal between the ECB and the Italian government over the measures but just days after the letter was sent, the bank began a controversial operation to buy Italian bonds in the market.

Yields on Italy’s 10-year bonds have come down from levels of more than 6 percent reached before the ECB intervened.

Market concerns remain, however, underlined by a downgrade of Italy’s credit rating by Standard & Poor’s and a bond auction on Thursday at which 10-year yields hit 5.86 percent, the highest level seen at such a sale since the launch of the euro.


The letter said the ECB Governing Council had met on August 4 to discuss the sharp sell-off of Italian government bonds triggered by investor concern over the government’s ability to tackle Italy’s mix of chronically weak growth and a mountainous public debt.

“The Governing Council considers that pressing action by the Italian authorities is essential to restore the confidence of investors,” it said, adding that there was a need for “significant measures to enhance potential growth.”

It called for full liberalization of local public services and professional services, with “large scale privatizations” in the local services sector.

The government is currently preparing a decree aimed at boosting infrastructure investment and Economy Minister Giulio Tremonti opened discussions on Thursday over plans to sell off some of the state’s extensive real estate holdings.

A Treasury document indicated Italy could raise 25-30 billion euros from selling state-owned property and a further 10 billion euros from auctioning CO2 emissions rights. It also wants to increase the return on state concessions worth around 50 billion euros.

The ECB also urged further reforms to the collective bargaining system, allowing company-level wages and conditions agreements as well as a full review of hiring and firing rules in conjunction with the establishment of an unemployment insurance system.

The government has moved some way toward opening up the collective bargaining system by making it easier to strike company-level deals and endorsing a ground-breaking accord between unions and car giant Fiat.

Turning to the fiscal side, the letter called on the government to bring forward measures already planned in a package of budget measures passed in July, with the aim of balancing the budget by 2013, a year earlier than planned.

It called for pension reforms, including changes to eligibility rules for seniority pensions and bringing the private sector retirement age for women into line with the public sector with the aim of making savings as soon as 2012.

It also said the government should consider cutting the cost of public sector employees, by strengthening staff turnover rules and if necessary by wage cuts.

It urged an automatic deficit reduction clause, ensuring any slippage from deficit goals would be automatically made up by horizontal cuts in spending and said borrowing, including by regional and local governments, should be tightly controlled.

The government has announced plans for a balanced-budget amendment to the constitution but the complex rules governing the process mean it could take years to be implemented.

Writing by James Mackenzie; Editing by Catherine Evans