Italy’s politicians ready to show their full confidence in Monti

Mario Monti, a respected economist and former European commissioner, is under pressure to quickly reassure markets that Italy will avoid a default that could tear apart the 17 countries that use the euro currency and push the global economy back into recession.

Mr Monti, 68, has already shown his mettle by making it clear he intends to serve until spring 2013 elections, rejecting calls by some to hold early elections next spring.

After rounds of meetings yesterday Mr Monti garnered support from the centre-left Democratic Party, Silvio Berlusconi’s People of Freedom party and the Confindustria, a powerful business lobby.

“We strongly support the birth of this government, because for us it is the last chance to regain credibility,” Confindustria leader Emma Marcegaglia said.

Mr Monti needs to win a confidence vote, likely this week, which would signal the start of his government.

Union leader Raffaele Bonanni said Mr Monti was close to completing his cabinet, but there was no immediate indication of when that list would be released.

Despite reports of progress, European markets closed lower yesterday as investors worried that politicians might pull their support in the future if austerity measures proved unpalatable.

Amid the uncertainty, the yield on Italy’s 10-year bonds jumped again to 6.94 per cent.

Last week’s spike above 7 per cent – a level considered unsustainable in the long term – raised fears Italy would eventually need a bailout like Greece, Ireland and Portugal.

A financial debacle in Italy would be even more serious as the country is considered too big for Europe to bail out.

Mr Monti was asked to form a government on Sunday, after Mr Berlusconi resigned amid weeks of market turmoil over Italy’s stagnant growth and high public debt, which at 1.9 trillion euros is nearly 120 per cent of GDP. Only the Northern League, Berlusconi’s allies, have refused to support his government.

They wanted early elections this spring, something Mr Monti has rejected.

The EU, meanwhile said new measures will be necessary for Italy to balance its budget as promised by 2013.

The eurozone avoided contracting in the third quarter, thanks mainly to Germany and France, but is widely expected to fall into recession imminently.

Spain’s borrowing costs shot up yesterday in an auction of short-term debt, in another sign that investors are growing more wary of holding the country’s bonds amid fears that the eurozone’s debt crisis is spreading.

The pressure on Spain’s public finances is forming the backdrop to this Sunday’s general election, at which the opposition conservative Popular Party is widely predicted to achieve a landslide win.

Greece’s public debt agency said yesterday that it has raised 1.3bn euros – £1.1bn – in a sale of 13-week treasury bills, at a marginally higher interest rate than it paid last month.

Debt-crippled Greece relies on international rescue loans to be able to stay solvent. Although unable to issue long-term debt due to high borrowing costs, it maintains a market presence through regular treasury bill auctions.

The country’s statistical authority yesterday said the galloping recession eased in the third quarter, with the economy shrinking by 5.2 per cent on the year compared with a 7.4 per cent contraction in the second quarter.

Greece has been in recession for the past three years.