Italy’s interest rates are being held down by ongoing bond investments by the central bank: On Tuesday, Italy was able to sell about $10 billion in long-term debt at an interest rate of 5.22 percent, lower than it paid in July.
Hair-trigger markets
Aug. 30 (Bloomberg) -- Antonio Garcia Pascual, chief southern European economist at Barclays Capital, discusses Spain's fiscal consolidation and economy.
Still, Bank of Italy deputy chief Ignazio Visco told a parliamentary committee that the markets are on a hair trigger.
“The costs of a possible deviation from the goals are very high,” he said, according to news service reports from Rome.
Spain is fighting a similar battle to be able to continue borrowing on its own. Compared with Italy and much of the rest of the euro zone, its outstanding level of debt is low. But annual deficits spiked during the recession, and the country must still complete a rescue of its banks, which were hit — as was the U.S. financial system— by bad investments in real estate.
The government has cut deeply over the past year, including trimming public employee salaries and raising the retirement age. But after Spain’s borrowing costs increased alongside Italy’s, the country was urged by the ECB to do more, and pushed forward the idea of a constitutional spending restriction.
Amendment vague
The amendment itself does not include numerical limits, only references to those set by the euro zone. The treaty establishing the common currency limits governments to annual deficits of no more than 3 percent of annual economic output, and a total outstanding debt of no more than 60 percent. The restrictions have never been enforced.
A follow-up law is expected to establish more precise targets, including stricter limits on Spain’s regional governments and cities.
With 20 percent unemployment and pressure for more austerity, Socialist Party Prime Minister Jose Zapatero called early elections for this fall — likely, according to polls here, to be won by the conservative Popular Party.
The election results, however, might not matter much. The constitutional amendment and other steps approved in recent months have a common goal.
“This sends a message that we are not going to be Greece,” said Pablo Vazquez, executive director of the Foundation for the Study of Applied Economics in Madrid.
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