Italy’s Quick Austerity Fixes Return to Plague Renzi’s Finances

The ghost of austerity past keeps haunting Italian Prime Minister Matteo Renzi as he tries to fix his country’s debt-ridden public finances.

For the second time in less than two months, Italy’s Constitutional Court may strike down a law passed by a previous government aimed at limiting spending.

Estimates by unions and government lawyers place the potential cost of an unfavorable ruling at as much as 35 billion euros ($39.4 billion).

While Renzi managed to get around the first judgment by paying back only a part of pensions due to retired workers, it’s unclear how long he can keep dodging the rulings, making investors jittery just as the bond market is falling.

“The government can only limit the impact of negative rulings on public finances,” said Loredana Federico, an economist at UniCredit SpA bank in Milan. “In the long term, emergency measures, such as a salary or pension freeze, need to be replaced by a structural and comprehensive review of public spending.”

The yield on Italy’s 10-year benchmark bond has risen more than 110 basis points from an all-time low on March 12. The yield was 2.19 percent as of 12:44 p.m. in Rome on Friday. That still compares with more than 7 percent when the euro debt crisis hit the country with full force in November 2011.


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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.