Geithner, Fitch praise Italy's new austerity moves

The austerity plan devised by Italy's new government won wide-ranging support Thursday, with both United States Treasury Secretary Timothy Geithner and the European Central Bank chief saying it would help the debt-strapped nation move in the right direction.

The Fitch Ratings agency also said Premier Mario Monti's plan, which includes new taxes, spending cuts and growth measures, has strengthened the credibility of Italy's attempts to balance its budget by 2013 and eased some pressure on the country's beleaguered credit rating.

Geithner expressed confidence in Italy's ability to rebound after Monti's tough reform package and announced that Monti will visit the White House in January.

"Monti has committed to a very strong programme of economic reforms," Geithner said, after meeting with him in Milan.

"Of course, the leaders of Europe are also working to strengthen the financial firewall that is essential for economic reforms in Italy and Europe to work," Geithner added. "These are vital and critical and also very challenging reforms, and they will take time, and I think we, the world, can be encouraged by the progress of these past weeks."

Emergency measures

Monti, an economist and former EU commissioner, announced emergency measures that seek to save €30 billion ($40 billion) through austerity measures and reinvest €10 billion ($13.4 billion) from those measures to enhance growth.

Geithner's support was echoed by ECB President Mario Draghi, who spoke after the European Central Bank cut interest rates for the second time in two months.

"It's an important budget that would certainly strengthen confidence," Draghi said. "Further measures need to follow geared to growth and competitiveness ... the essence is in the delivery."

However, Fitch said the outlook on Italy's A+ rating remains negative, reflecting the need for Italy to deliver substantive structural reforms to boost growth. It added that Italy also has to demonstrate it can continue to tap bond markets at sustainable rates, given its need to rollover a large chunk of debt next year. Italy has to refinance €200 billion ($268 billion) by the end of April alone.

Fitch also said the negative outlook is also in part due to the continuing Eurozone sovereign debt crisis. Leaders of the EU, including Monti, are heading to Brussels later for a key summit Friday that could determine the future of the shared euro currency.

Eurozone under threat

Italy has a staggering public debt - €1.9 trillion ($2.5 trillion) or 120 per cent of its GDP - but it is considered too big for Europe's current bailout facilities to bail out. A default by Italy could break up the 17-nation Eurozone and reverberate across the global economy.

Fears that Italy was losing control of its public finances heaped massive pressure on the country's borrowing rates recently. For much of the past month, the yield on the country's 10-year bond has hovered around seven per cent, the threshold that eventually forced Greece, Ireland and Portugal into seeking bailouts.

The rescue plan was approved Sunday by Monti's cabinet of technocrats but it has yet to get parliamentary approval. Still, it has already prompted the country's 10-year bond yield to fall to around six per cent.

"The overall message that the package conveys - that the Italian government is seeking to deliver a credible fiscal consolidation programme over and above that already outlined this summer - is encouraging," Fitch said.

The ratings agency also praised Monti's intention to liberalise Italy's rigid labour laws and open up restricted professions to further competition.

Monti replaced Silvio Berlusconi as Italy's premier last month after markets lost faith that Berlusconi could deliver the financial reforms his nation needed.