AFP reported that Italy rushed to adopt EUR 48 billion in austerity measures and warned of the fallout from high borrowing rates as Europe grapples with a deepening sovereign debt crisis.
Final approval for the wide ranging budget cuts in parliament was expected imminently, as the European Union braced for results from stress tests on 91 banks that are being closely watched by a wary investment community.
Financial markets have been highly volatile in recent days as a credibility crisis over heavily indebted European countries' ability to repay loans has threatened to spread to Italy, the euro zone's third biggest economy.
Mr Olli Rehn EU's Economic Affairs Commissioner said that "Very high public debt remains the most vulnerable point of the Italian economy particularly in this climate of high uncertainty. Intense negotiations are underway on what measures to take on Greece and how to avoid contagion as officials prepared for a crisis summit in Brussels in the coming days to discuss a possible second bailout for Greece."
Talks between the Greek government and private creditors ran into a second day in Rome yesterday after the International Monetary Fund urged banks and insurers to shoulder up to EUR 33 billion of the costs of a new rescue.
The Italian parliament has raced to adopt its austerity measures in record time after a draft was put forward by the government just two weeks ago. In a report out yesterday, the central bank warned that if bond rates remain at their current elevated level this could have considerable costs for public accounts and a risk of repercussions on the financing costs of the economy.
The report added that recent tensions in the eurozone had increased the urgency of proceeding with a consolidation of public finances in order to lower risk premiums and diminish long term borrowing rates. It added however that "In the immediate future, the costs of increased yields on bonds for our country are limited."
The central bank also raised its forecast for gross domestic product growth this year to 1% from 0.9% but kept its prediction for 2012 at 1.1%. The Italian economy grew by 1.3% in 2010.
Italy is the world's eighth biggest economy but is laden down by a public debt of about 120% of annual output, even though its budget deficit has remained relatively moderate compared to deficits elsewhere in Europe.
The austerity budget, which will cut family tax benefits, reduce top tier pensions, slash regional subsidies and launch privatizations, aims to reduce the deficit to 0.2% of output by 2014 from 4.6% in 2010.
(Sourced from AFP)
