ECB Aug Letter To Rome Didn’t Tie Bond Buys To Measures:Press

Author: Market News International | Category: News

PARIS (MNI) – A secret letter sent early last month to Italy’s
Prime Minister Silvio Berlusconi by European Central Bank President
Jean-Claude Trichet and his soon-to-be successor Mario Draghi made no
mention of possible ECB aid to Rome in exchange for budget cutting and
reform measures, contrary to rumors that have floated around markets
since then, an Italian newspaper reported today.

Daily Corriere della Sera obtained the once-confidential letter. It
said the letter was very explicit, extremely clear and harsh, “almost to
the point of cynicism,” and that the language used — perhaps because of
the urgency of the moment — was “foreign to the classical scheme of
central bank liturgy.” It came at a dangerous and dramatic time, when
Italian spreads were widening quickly as the debt crisis made its first
advance on the core of the Eurozone.

Despite the sharp and dangerous rise of Italian yields, Trichet and
Draghi did not give even a “minimal signal” that the ECB might intervene
in bond markets to support Italy in exchange for the difficult measures
they were urging Rome to implement, the paper said.

It noted that the letter landed in Rome August 5, and eight days
later the government launched its proposal to balance the budget by
2013, a year earlier than previously proposed. Three days after that,
when the markets opened on August 16, the ECB intervened in bond markets
to defend Italy’s sovereign debt.

In the letter, Trichet and Draghi urged a number of heavy reforms
which they said were “essential” in order to maintain the integrity of
Italy’s “sovereign signature” — meaning the rating on its government
bonds.

In explicit terms, the newspaper said, they explained the need for
Italy to revamp laws governing hiring and firing, openly using the word
“dismissal.” They also asked for Rome to slash the public deficit to
just 1% of GDP by 2012, a move requiring cuts equal to E50 billion or 3%
of the country’s GDP in a single year.

They urged Rome to tighten the conditions for obtaining retirement
pensions and to raise the retirement age of women in the private sector,
in such a way as to produce savings already in 2012. They also requested
that public sector employment costs be “significantly” cut, “if
necessary by reducing pay.”

The two senior ECB officials also argued that “full liberalization”
of the professions and of local public services would enhance economic
growth. They prescribed “large scale privatization” and a “serious
commitment to abolish and consolidate some intermediate administrative
levels,” including provincial governments.

–Paris bureau, +331-42-71-55-40; bwolfson@marketnews.com

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