Italy has a huge exposure to the risk of debt crisis contagion in the euro area, Prime Minister Mario Monti said on Thursday, suggesting that the European Central Bank (ECB) should intervene to reduce borrowing costs, according to Reuters. Mario Monti, a respected former European Union Commissioner who became prime minister of Italy in November 2011 with the goal to implement tough austerity measures, expressed his frustration with the increased financing costs, starting in mid-March of this year, despite estimates that the budget deficit in 2012 will be well below the EU average.
“We are obviously in a difficult situation. We have a country that makes a huge effort for consolidation and structural reforms, costly politically and socially, and sees its position threatened by the huge risks of contagion”, the Prime Minister said. Contagion is a result of the general weakness of the system and not the weakness of Italy, Monti said during a conference in Brussels.
Italian 10-year term bond yields rose Wednesday over the 6% threshold to a sale of securities affected by the amplification of investor fears about the banking situation in Spain. For Spain, the 10-year bond yields is close to 7%, a level that forced Ireland and Portugal to seek international financial support. Because of the increase in yields, Monti asked the ECB to step up its efforts to ensure stability in the euro area and he seems to suggest that the bank should buy Italian bonds to reduce borrowing costs. “I think the ECB should consider its responsibility for the integrity of euro and financial stability,” said Monti.
He warned that the mechanism of monetary policy could be questioned if the spread of bonds in the euro area countries are disconnected, as happened recently, from the reality of their economic policies. ECB, which can not directly finance governments, used similar arguments to justify the purchases of Italian and Spanish bonds made last year. European sources have said that Spanish Prime Minister Mariano Rajoy put pressure on Brussels and Berlin, for the ECB to buy Spanish bonds. Monti also warned about the challenge of popular opposition, if investors will require countries to implement austerity measures larger than those assumed already by the governments.
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