Before Italians turned to Mario Monti late last year to rescue them, the country’s debt crisis had sent its borrowing costs skyrocketing and the government’s credibility tumbling.
Anxiety eased for a time once Monti took the helm as prime minister, and so did the financial pressures on Italy, the euro zone’s third-largest economy.
But now, seven months after the well-regarded economist Monti was tapped to replace billionaire playboy Silvio Berlusconi, faith in the Italian government is again plummeting — inside and outside the country. And with global investors increasingly squeamish about lending Italy money, the interest rate on government bonds is soaring again, breaching the dangerous 6 percent level on Monday.
With concerns about Greece ebbing a bit after a pro-bailout party prevailed in elections Sunday, Italy — along with Spain — is moving back into the cross hairs.
Monti’s problems are as much about politics and public perception as they are about the economy. Since he and his team of technocrats took over, they’ve managed to push through a number of radical belt-tightening measures, aimed at taming the government’s mammoth debt, but have failed to reassure nervous investors. The cost of lending Italy money, especially as measured in terms of the interest-rate “spread” compared with safe German bonds, resumed its ascent three months ago.
“We’re dealing with market psychology, which due to investors’ prejudices believes Italy will be the next domino to fall,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy in London.
Italian media outlets, which in the beginning hailed Monti as a hero, have begun criticizing him with gusto. Vauro Senese, a popular political cartoonist for Il Manifesto newspaper, drew a cartoon featuring Monti with a top hat and cane titled “Spread Astair.” Another depicted a future scenario in which the people of Italy are ushering Monti out the door. It states, “When Berlusconi left, Italians threw coins at him. When Monti left, they didn’t have even that.”
In an op-ed last week in La Repubblica, Editor in Chief Eugenio Scalfari, who had supported Monti in the past, blasted him for appointing ineffective heads of public agencies who had been in the previous administration for political reasons. “Monti,” he wrote, “has lost his allure.”
Monti’s approval rating has fallen steadily from a high of 71 percent in December, shortly after he became prime minister, to 33 percent in June, according to the SWG-Agora poll.
For the rest of the world, the prospect of a meltdown in Italy is so alarming because of the nation’s sheer size: It is the world’s eighth-largest economy and 21 / 2 times the combined size of Greece, Portugal and Ireland — the three European countries whose governments have been bailed out so far — and 40 percent larger than Spain.
Much of the world’s attention in recent days has been on Greece, where a government default and exit from the euro zone were looking ever more likely until the elections Sunday. Although the fallout if Greece left the euro zone could be enormous, many economists say the financial damage could be contained if it was addressed in a gradual and in an orderly manner. And if Spain were to need an international bailout, it could be cobbled together, in theory, though at great expense.
But Italy is arguably too big to fail. There is simply not enough money in the rescue funds established by European countries to bail it out. And an Italian financial collapse would likely send shocks throughout the global markets that could plunge the world into a deep recession.
Italy’s main problem is its mammoth debt burden, which stands at $1.9 trillion euros ($2.4 trillion), a whopping 120 percent of its gross domestic product. To keep from defaulting on payments, Italy needs to significantly increase its revenue while trimming government spending or keep the yields for its bond rates down. Neither is happening.
But Italy does not have the other weaknesses that led some of its neighbors to seek a bailout. Its banks are sound and the government takes in more in tax revenue than it spends.
Since Monti’s team took over, it has moved ahead with several dramatic initiatives, ranging from tax hikes on property to pension cuts that represent major savings but are deeply unpopular. A second set of reform measures was passed Friday and focused more on stimulating economic growth by getting companies to invest. These steps included urban development funds and tax breaks for firms that hire skilled workers.
Critics fault Monti for failing to get Italian lawmakers to cut their own pay and raise taxes on the wealthy. He has also been criticized for not doing more to collect taxes from businesses, which for decades have gotten used to cheating on their returns.
Nor has Monti provided the inspiration and reassurance that the public craves. Tommaso Valletti, an economics professor at the Imperial College Business School and at the University of Rome Tor Vergata, said that Monti — a former academic who served as a member of the European Commission — is too dry and formal when speaking to the public about the crisis.
“Where Monti has failed is in communications. He has not been able to convince people he has things under control, even when he does,” Valletti said.
In recent days, Monti’s government has had an especially hard time getting its story out. Austrian Finance Minister Maria Fekter set off a wave of panic early last week when she said that Italy would need a bailout soon. On Thursday, Michael Hewson, an analyst with CMC Markets, wrote in a research note that “Italian PM Mario Monti’s claims that the country won’t need a bailout could well ring very hollow indeed.” Berlusconi chimed in on his Facebook account arguing that Italy should say “ciao” to the euro if the European Central Bank doesn’t print more money to support struggling European economies. International bondholders responded by driving up borrowing rates.
A demonstration organized by Italy’s three largest labor unions on Saturday brought central Rome to a standstill, drawing tens of thousands from across the country to protest tax hikes, pension cuts and other reforms that they said unfairly hit the working class at a time when unemployment is rising.
Erica Nicoli, 28, who works in human resources, complained that wages have not changed but prices have gone up, and that many of her classmates do not have jobs. Lidia Chesches, 35, a waitress who recently lost her job, said, “Why is it that workers have to be punished with these reforms?”
Mario Fulco, 54, who works as an administrative assistant, said that he is also disappointed by some of Monti’s initiatives but that Italian citizens should continue to support him.
“All the politicians are trying to let Monti do the dirty job of making cuts so they can look good in the next election,” he said, “but it takes a real dedication to do the work he is doing, and while people are having a hard time now, future generations will understand this.”