ECB called for Italy budget cuts

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29 September 2011 Last updated at 10:45 GMT Not all the reforms wanted by ECB president Jean-Claude Trichet were introduced The European Central Bank told Italy to make sweeping changes to its labour laws and take tough action to cut the deficit, a leaked letter has shown.

In the letter, sent to prime minister Silvio Berlusconi in August, the ECB said the severity of Italy's economic situation made "bold and immediate" action "essential".

The ECB said its list of demands should be enacted by the end of September.

The letter was published in the Italian media on Thursday.

Dated 5 August, the letter came from ECB president Jean-Claude Trichet and his designated successor, Bank of Italy Governor Mario Draghi.

In unusually clear language, the signatories told Mr Berlusconi to make deep reforms, including opening up public services and overhauling pay bargaining and hiring and firing rules.

The ECB called for "pressing action", "essential to restore the confidence of investors" as markets panicked over fears that Italy could be the next country to succumb to the eurozone debt crisis.

Days after the letter was sent, the ECB began its controversial programme to buy Italian bonds, a move aimed at reducing the country's borrowing costs.

The ECB has always rejected suggestions that its bond-buying programme was linked to demands for austerity cuts.

Continue reading the main story Use the dropdown for easy-to-understand explanations of key financial terms:AAA-rating GO The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is miniscule.The letter, published in Corriere della Sera, said Italy should aim to bring the deficit down to 1% of gross domestic product by 2012 and balance the budget by 2013, a year ahead of schedule, "mainly via expenditure cuts".

It said: "In view of the severity of the current financial market situation, we regard as crucial that all actions listed" be ratified by 30 September.

"We trust the government will take all the appropriate actions," it ends.

The Italian parliament passed a 60bn-euro austerity package earlier this month.

'Eye-watering' costs

While some tax and budget changes were introduced, others, including pay and pension reforms, were implemented either partially or not at all.

On Thursday, opposition parties in Italy said the disclosure of the letter proved that Mr Berlusconi had placed Italy under the "trusteeship" of the ECB.

The ECB's bond-buying programme has as yet failed to dent Italy's borrowing costs.

On Thursday the central bank sold 6.9bn euros of bonds, but at sharply higher interest rates. The yield on the 10-year bonds rose to 5.86%, up from 5.22% last month.

David Schnautz, rate strategist at Commerzbank, described the yield as "eye-watering".

He said: "Obviously it's not a comfortable level on a sustained basis and the headlines don't help. Despite ECB intervention for more than one month Italy is still printing at these levels to get the paper out of the way."

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IMF warns on drastic budget cuts

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5 October 2011 Last updated at 14:41 GMT Changing economic times will mean a change in economic policy, the IMF said Europe's stronger economies should avoid imposing drastic budget cuts at the expense of growth, a report by the International Monetary Fund has said.

If things worsen in the UK, Germany or France, they should "consider delaying" cuts, because they can borrow "at historically low" interest rates.

The IMF also warned that a recession in Europe in 2012 could not be ruled out.

Separately, a Markit PMI study said the eurozone's service sector shrank for the first time in two years last month.

The IMF's warning came in its latest 100-page report on the economic outlook for Europe.

"Finding a durable solution to the euro area sovereign crisis has become more than overdue," the IMF said in its report.

"(This) will require some difficult decisions to improve crisis management and a demonstration of unity behind the project of economic and monetary union that will convince markets.

"The pursuit of nominal deficit targets should not come at the expense of risking a widespread contraction in economic activity," the IMF said.

"If (economic) activity were to undershoot current expectations and risk a period of stagnation or contraction, countries that face historically low yields (for example, Germany and the UK) should also consider delaying some of their planned consolidation."

The IMF's Europe director, Antonio Borges, said that Europe had edged closer to recession. "We still predict growth in 2012, but very modest," he said.

But if economies go into reverse "all those countries with fiscal leeway might want to consider" changes in fiscal policy, he said.

'Spreading malaise'

The weakness of the eurozone's economic recovery was underlined in data from the latest Markit/CIPS Services Purchasing Managers' Index.

For September, the index fell to 48.8, from 51.5 in August, its lowest reading since July 2009. A reading below 50 indicates contraction.

Markit said that a service sector downturn that began in smaller members of the 17-nation eurozone had spread throughout the bloc.

"The malaise is spreading to the core, where surging rates of expansion earlier in the year have turned rapidly into contraction in Germany and only very modest growth in France," said Chris Williamson, chief economist at Markit.

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VIDEO: IMF warns on drastic budget cuts

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5 October 2011 Last updated at 15:13 GMT Help

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