Italy May Ask for Aid

Monti may tap eurozone rescue funding as Spain makes more cuts

Prime Minister Mario Monti of Italy, an economy considered too big to bail out. (Photo: AP) Prime Minister Mario Monti of Italy, an economy considered too big to bail out. (Photo: AP)

Proof that the eurozone debt crisis is far from over came as Prime Minister Mario Monti of Italy said he might look for financial help from the rescue fund to shore up the country’s bonds.

Reuters reported Wednesday that Monti addressed the issue on Tuesday after a meeting of finance ministers in Brussels. Italy’s borrowing costs have risen to the point that they could reach unsustainable levels above 7%. Yields fell below 6% on Tuesday after having risen above it the day before, as markets worried that Italy would be the next nation to succumb to debt woes. Italy, the eurozone's third-largest economy, is seen as too big to bail out, and the mere suggestion that it might require aid was another factor to worry already-spooked investors.

Speaking of the European Stability Mechanism (ESM), Monti was quoted saying, "It would be hazardous to say that Italy would never use (the ESM). Italy may be interested."

Monti’s comments did nothing to reassure markets, already disappointed at the outcome of the meeting. They had expected more action than what was agreed on—an extra year for Spain to meet deficit reduction targets, a structure for the aid package for the country’s troubled banks. Madrid was given until 2014 to hit agreed-upon debt levels, provided that it enacted additional budget cuts.

Bloomberg reported that Prime Minister Mariano Rajoy of Spain announced those budget cuts in a package before the Spanish Parliament on Wednesday, along with additional tax increases. The new austerity program, Rajoy’s fourth in seven months, is designed to trim a further 65 billion euros ($80 billion) from the budget over the next 2½ years, a move that raises the risk of a deeper recession.

Among the measures announced by Rajoy are an increase in sales tax from 18% to 21%; elimination of a tax rebate for homebuyers and a year-end bonus for some public employees; reductions in unemployment benefits; and consolidation of some local governments. This brings the budget cuts to approximately double the ones Rajoy announced earlier.

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