Italy’s Chamber of Deputies Approves 54 Billion-Euro Austerity Package

A 54 billion-euro austerity plan won a confidence vote in the Chamber of Deputies on Wednesday, paving the way for its final approval this evening. The 630-seat lower house approved the measure, voting 316 to 302. At 7:40 p.m. this evening, it will vote on the plan again, this time in a procedural ballot that conforms with parliamentary rules. The Senate approved the measure on September 7, voting 165 to 141 in favor of its adoption as protesters hurled bombs and firecrackers at the building.

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As is the case with Greece, Italy’s highly unpopular austerity measures are a condition of the European Central Bank’s bailout package. “Its complete implementation will be vital,” said European Union President Herman Van Rompuy at a press appearance with Italian Prime Minister Silvio Berlusconi in Brussels yesterday. The plan’s “adoption is important, not only for Italy but for all of the euro zone.”

In an auction Tuesday, Italian borrowing costs surged when the Treasury sold 3.9 billion euros of 5-year bonds to yield 5.6%, up from 4.93% at the last sale on July 14.

The legislation voted on in the Chamber of Deputies today revised measures approved by decree last month to convince the ECB to buy Italian bonds. The previous package failed to reassure investors, resulting in an 11-day fall in Italian bonds that ended on September 6 when the government added a one-percentage point increase in the value-added tax and a new levy on incomes over 300,000 euros to the plan.

After today’s vote, the premium demanded by investors to hold Italian bonds over benchmark German bunds narrowed by one basis point to 377 basis points. The spread widened to 391 basis points on Tuesday, its highest since before the ECB started buying Italian bonds on August 8 after the Italian government approved the original austerity package.

After the plan is adopted, the government will then review its policies on economic growth and make any necessary adjustments. “If there are things to change in our growth measures we will, and if there are things to add, we will,” Finance Minister Giulio Tremonti told reporters at a meeting of G-7 finance ministers in Marseille, France on September 10.

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Both Standard & Poor’s and Moody’s Investors Service have warned that they may downgrade Italy if the government misses its revenue and deficit targets. The Organization for Economic Cooperation and Development forecast last week that the Italian economy will contract 0.1% by the end of the current quarter.