Italy's Monti warns of contagion

2012-05-31 14:03

Brussels - Italy is hugely exposed to the risk of contagion from the debt turmoil in the eurozone, its prime minister said on Thursday, suggesting the European Central Bank take action to help cool borrowing costs.

Mario Monti, a respected former European commissioner who took over the premiership in November to enact tough austerity measures, expressed frustration at borrowing costs that have risen for Italy since mid-March despite a 2012 budget deficit forecast at well below the EU average.

"It is obviously a difficult place to be in, when you have a country displaying massive and concentrated efforts of consolidation and structural reforms, which are obviously politically and socially costly, and sees its position threatened by huge possibilities of contagion," Monti said.

"Contagion is there because of the overall weakness of the system rather than for the specific weakness of my country," Monti told a conference in Brussels via video link from Italy.

On Wednesday, Italian benchmark yields broke above the 6% danger level as investors required higher returns to buy five- and ten-year debt at an auction tainted by escalating concerns about the banking system in Spain.

Equivalent Spanish yields have risen close to the 7% level at which Ireland and Portugal were forced to seek international bailouts.

ECB bond-buying?

Given the rising yields, Monti called on the ECB to step up its efforts to ensure stability in the eurozone and appeared to suggest that the bank should buy Italian bonds to bring the spreads down.

"I believe that the ECB should consider within the realm of its responsibility the integrity of the euro and equally, to ensure financial stability," he said.

"The functioning of the transmission mechanism of monetary policy could be put into question if the spreads between various countries become disconnected, as they have become recently, from the reality of policymaking in different countries."

In private, officials say Spanish Prime Minister Mariano Rajoy has been pressing Brussels and Berlin for the ECB to buy Spanish sovereign debt too.

Monti also warned of a popular backlash if investors demanded countries embark on deeper fiscal cuts beyond what was already been undertaken.

"I know there is a running argument that unless investors put pressure through higher interest rates on governments, governments will not find the determination to do consolidation and structural reforms. Well, it may also be the opposite."

"We have to be mindful of the sustainability of fiscal discipline and the reform process... It is obvious that there is going to be, sooner or later, a backlash against fiscal and structural discipline," Monti said.