Are markets already losing faith in technocratic governments?
That was certainly the impression from the somewhat disappointing result at Italy’s latest bond auction overnight. Italy raised €7 billion ($US9.1 billion) from the sale of medium and long-term government bonds, but investors demanded a yield of nearly 7 per cent on the 10-year bonds. While this is an improvement from the record highs seen last month, Italian long-term bond yields are still at a level that investors consider unsustainable, given that Italy needs to raise €450 billion from debt sales in 2012.
At a traditional year-end press conference overnight, Italian Prime Minister Mario Monti, who formed a technocratic government last month following the resignation of Silvio Berlusconi, conceded that the country’s "financial turbulence absolutely isn't over.”
But he defended his government’s recent €20 billion austerity package of spending cuts and tax hikes against criticisms that it would only push the troubled Italian economy further into recession. Monti acknowledged that the austerity package had "many disadvantages", but said that budget discipline was essential to restoring confidence in Italy's public finances. He also promised to outline a new package of growth measures, including labour market reforms, next month.
But many investors query whether Rome will have the resolve to push through stringent austerity and difficult reforms. They argue that Italy could well end up following a similar path to Greece, where the technocratic government headed by Lucas Papademos is deeply divided, and its efforts on unpopular reform measures have largely ground to a halt.
Last month, Greece's Socialist party, the opposition conservative New Democracy party, and small, nationalist Laos party agreed to form a transitional government under Papademos, ahead of fresh elections next year.
Papademos is keen to push ahead with key reforms – including labour market reforms and liberalising Greece’s closed professions – ahead of next month’s visit of officials from the "troika” – the European Central Bank, the IMF and the European Union – who will negotiate the country’s latest €130 billion bailout package.
But his recent efforts to implement reforms to pensions and the country’s pension system have been thwarted, with ministers from rival parties openly objecting to the measures.
The troika is likely to conclude that Greece has made very little progress in implementing the conditions that it was set in exchange for the €130 billion bailout. The country’s privatisation program has ground to a halt. Athens was supposed to sell off €50 billion of government-owned assets by 2015, but so far only €1.7 billion has been raised from asset sales.
Athens has also made little progress in trimming the country’s bloated public service. In October, the Greek government yielded to pressure from the troika and announced a controversial plan to transfer around 30,000 public servants into a special labour reserve by the end where they would receive roughly 60 per cent of their previous salary, and could face outright dismissal after a year. So far, only around 1,000 workers have been transferred to the reserve, according to the German publication, der Spiegel.
Even more worrying is the fact that Athens was supposed to have reached an agreement with its private sector creditors – banks, insurance companies, and pension funds – which involved them writing down 50 per cent of their debts by the end of 2011. But the negotiations have stalled, and it is clear that the deadline won’t be met.
At the same time, public confidence in the Papademos administration is slumping. According to der Spiegel, only 26 per cent of Greeks have confidence in the Papademos government, a sharp slide from the 48 per cent who expressed confidence when it was first formed. And, it adds, "the proportion of Greeks who distrust Papademos has surged to 65 per cent from 38 per cent. Almost four out of five Greeks now think their country is heading in the wrong direction.”