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Italy Eyes Privatization as Market Tension Eases

by James Mackenzie and Giuseppe Fonte

ROME - The Italian government bolstered an austerity package on Wednesday, announcing its intention to sell stakes in state-owned companies, while political consensus on debt-cutting measures helped calm nervous markets.

Italian Finance Minister Giulio Tremonti listens during the Italian Banking Association (ABI) annual assembly in Rome, Wednesday, July 13, 2011. "We must begin a process of privatisation once the crisis period, which has blocked everything, is over," Tremonti told a meeting of the Italian banking association in Rome. (AP Photo/Riccardo De Luca) less Economy Minister Giulio Tremonti said the four-year austerity package, aimed at bringing the budget into balance by 2014, would be approved by Friday and promised to step up privatisation moves once the crisis was over.

Bond markets have targeted Italy, the euro zone's third largest economy, because of doubts about its ability to sustain one of the world's heaviest debt burdens.

"We must begin a process of privatisation once the crisis period, which has blocked everything, is over," Tremonti told a meeting of the Italian banking association in Rome.

According to the text of an amendment to the austerity package, the government will approve "one or more programmes for the disposal of state shareholdings" by December 2013.

With opposition parties promising not to block the austerity package, a nervous calm returned to markets after a selloff this week sent yields on 10-year Italian bonds to a record 6 percent.

Tremonti's own position has been a key issue as markets took fright last week at signs he had fallen out with Prime Minister Silvio Berlusconi and was isolated in cabinet, a problem exacerbated by a corruption probe targeting a close former aide.

On Wednesday he brushed aside rumours he could be forced out and issued a statement expressing "much satisfaction" after Naples prosecutors were quoted as saying he was not a target of the investigation into his former adviser Marco Milanese.

Seen by international investors as a guarantor of Italy's financial stability, Tremonti's position appears to have been strengthened by the crisis of the past few days.

Late on Wednesday, he held talks on amendments on issues ranging from pensions to health care but no serious impediment to an accord was anticipated.

Ratings agency Fitch said it expected the government to succeed in its objective of eliminating the deficit by 2014 and said this week's market turmoil did not reflect fundamentals.

Italy has avoided the worst of the financial crisis thanks to strong controls on public spending, a conservative banking system and a high level of private savings.

But with Greece and Ireland both in trouble, markets have been unnerved by a public debt level that is among the highest in the world at 120 percent of gross domestic product.

MARKET TEST

European Central Bank Governing Council member Mario Draghi said the government should move ahead with further measures to ensure it meets its budget reduction target.

"The substance of future measures aimed at balancing the budget by 2014 should be defined as rapidly as possible," he said. "This is what markets are looking at above all today."

He also criticised the European policy response to the debt crisis, saying policymakers needed to "bring certainty to the process by which sovereign debt crises are managed" with clearly defined objectives and instruments.

The market drop on Friday and Monday wiped about 26 billion euros ($37 billion) off the FTSE MIB blue-chip index and sent Italian bond yields up to more than 6 percent, the highest seen since the launch of the euro more than a decade ago.

A further test of Italy's ability to keep tapping the markets will come on Thursday, when the Treasury offers up to 5 billion euros of long-term BTP bonds. Markets are waiting nervously to see how the auction succeeds.

A senior Bank of Italy official said the impact of the recent surge in yields was limited in the short term but would be considerable if it persisted, adding around 3 billion euros to government borrowing costs in the first year and more later.

"If these kind of levels persist, the burden for public finances would be severe," Ignazio Visco, deputy director general of the Italian central bank, told a Senate hearing.

But analysts said the quick accord on the austerity package had soothed fears of a long political stalemate creating a crisis that could spiral out of control.

"The growth issue remains, but there was an immediate, patriotic reaction by the Italian political class that has positively impressed investors," said Deutsche Bank analyst Gilles Moec.

Opposition parties have said that while they may vote against the package, they will not mount delaying tactics, meaning the government's majority will be enough to see the measures through.

The many lawyers on the government side objected late on Wednesday to proposals to liberalise professions including the law.

Other amendments would ease the burden for small investors of a planned tax on financial instruments, impose a tax of 5-10 percent on pensions above a certain limit and set a 10 euro fee payable on specialist medical consultations.

(Additional reporting by Giuseppe Fonte, Michel Rose, Valentina Za, Nigel Tutt, Luca Trogni and Elvira Pollina in Milan; Writing by Silvia Aloisi and James Mackenzie; Editing by Michael Roddy)

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