In a word, it could be better. In 2009, Italy’s GDP decreased by 5%. It is expected to grow modestly, by 0.8%, this year, and by 1.4% in 2011. In the same years, the euro area’s GDP either decreased less (by -4.1% in 2009) or is expected to grow faster (by 0.9% and 1.5% in 2010 and 2011, respectively). So, during the crisis and immediately after, Italy is doing slightly worse than its peers, and its recovery seems to be lagging.

But these are minor issues compared to what happened in the preceding, crisis-free years. In 2000-2008, the country’s average annual rate of growth was about 1.15%. Meanwhile, the EU’s 27 national economies grew at an average annual rate of 2.2%, while the euro zone grew 1.95% per year. Italy today is part of the global economic bust, but it didn’t experience much of a boom in the first place.

The reason is that Italy’s public enemy No. 1 was never the global recession: It is Italy itself, or at least the structural problems from which the country was suffering well before the crisis. Such problems include, but are not limited to, an unsustainable fiscal burden; unrestrained tax evasion; a large, inefficient public sector that crowds out private investments; and a legal and regulatory environment that is hostile to business and encourages corruption. As a result, Italy has consistently been one of the slowest growing countries in the EU.

Not content with the popular argument that Italians are simply anthropologically ill-suited to economic success, we at Istituto Bruno Leoni have developed two indexes that may help to explain where our major problems lie. Our Index of Freedom of Enterprise—which suggests Italy is the least business-friendly country in the European Union—shows that the leading reason things are so bad is the lack of “freedom from regulation.” Compared to its peers, Italian regulation is of poor quality, and enforcement lacks transparency, stability, and effectiveness. Our Index of Liberalizations—which measures the level of legal, regulatory and fiscal barriers to entry in 15 key economic sectors—estimates that our economy is only 49% open, as compared with the best practices in Europe. Given all that, it’s little surprise that 17.5% of Italian business is transacted on the black market.

Where Rome deserves credit in recent years is its refusal to respond to the financial crisis with Keynesian “stimuli” as did so many of its EU partners. Italian Economy Minister Giulio Tremonti—ironically, a staunch critic of free markets—should be especially lauded for resisting still more government spending that would only have squeezed out more private players. But while we initially avoided making our problems worse, we have done little to alleviate the problems themselves.

The package of fiscal reforms currently dominating the attentions of the Italian parliament are not enough: They neither streamline bureaucracy, nor do they open markets, nor do they lower taxes. Indeed they may raise taxes, directly or indirectly. Hence, the overhauls may have little, or even a negative, effect on growth.

True enough, the single most obvious way to gain competitiveness—cutting supply-side taxes—may be very hard to achieve under the current budgetary and political circumstances (although not impossible). There are, though, a number of cost-free reforms that might also stimulate GDP growth.

First, we need to see a major effort in eliminating red tape: Virtually every international survey shows that complying with Italian law is so time- and resource-consuming that it creates a major competitive disadvantage. For instance, it takes some 257 days to settle an Italian construction permit, a full 100 days more than the OECD average, according to the World Bank’s 2010 Doing Business report. Meanwhile, it takes roughly 1,210 days (more than three years and four months) to enforce a contract. It would be naive to try and understand the extent of corruption and black-market dealing in Italy without seriously looking at the government-created incentives for such activities.

Second, the government should aggressively pick up on its privatization and liberalization efforts. Italy made some progress on this front in the late 1990s. But since then little has been done. Mail services should be completely liberalized by Jan. 1, thanks to the EU’s postal directive, but it is not yet clear how seriously Rome is taking this challenge. Next, local public services—particularly water services—need to be reformed, and quickly. Too many consumers and local businesses remain locked out of these markets, and so prices remain artificially high. A recent Bank of Italy paper calculated that “reducing the [public] service sector markups to the levels of the rest of the euro area” would, long-term, boost Italian GDP by 11%, adding that half of those gains would come in the first three years after implementation.

To make liberalization and privatization work, though, the rules must also be fairly implemented. To that end, conflicts of interest must be addressed, particularly those that come up when—as is often the case in Italy—a public body simultaneously serves as regulator and shareholder of some market actors. Privatizing all government-owned companies (including those that are only partially-owned by the government), would not only liberate competition and level the playing field, but also generate extra revenues that might be employed to reduce the public debt.

The failure to address these problems held Italian prosperity back long before the financial and sovereign-debt crises hit. The late writer Giuseppe Prezzolini used to say that “time is the most abundant resource in Italy, given how much of it is wasted.”

But if the last six months of European economics have taught us anything, it’s that Italy, and governments like it, have run out of time to waste.

Story from Wall Street Journal

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• european economics, european union, financial crisis, fiscal reforms, gdp growth, italian business, italian economy, italian government, taxes

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Berlusconi praised the excellent state of relations between the two countries. “Italy and Russia have always enjoyed a special friendship and this is proven by the fact that in the first quarter of the year bilateral trade rose by 41 percent,” he stressed.

The two leaders observed that the commercial liaison ahead was even brighter for prosperous cooperation between Italian and Russian firms.

Acknowledging that the crisis was over in both countries, Medvedev said he looked forward to boosting trade with Italy. ” Russia is expected to grow by 5 percent this year and Italy as well is set to perform well.”

But it’s not just a question of economic interests. Personal relations between Russia and Italy are outstanding.

Appealing to Berlusconi, Medvedev said he was “without doubt among the most authoritative and experienced” leaders of the Group of Eight (G8), adding that he “always followed very carefully what Silvio does and how he answers questions”.

Berlusconi expressed his desire that Italian firms had a major role in Russia’s modernization process, while Medvedev invited Italy’s technological industries to invest in his country so as to fill Russia’s innovation gap and transfer precious know-how and skills.

As for strategic sectors of future bilateral agreements the Russian president indicated pharmaceutics, space, nuclear energy and telecommunications. “In all these areas Italian firms are more than welcome,” he said.

The bilateral meeting was an informal one, no institutional agreements were signed but it stood as a unique opportunity to analyze the state of current relations and pave way for stronger ties.

Berlusconi said that the year 2011 is set to be crucial in advancing cultural relations as well thanks to two major events: the simultaneous celebration of both the Italian culture year in Russia and of the Russian culture year in Italy.

Among the events planned, special tourism projects and documentaries will be playing a major role.

“The Italian language in Russia is one of our core values,” Medvedev observed, adding how strategic reciprocal knowledge of each other’s language was not only at an institutional, political and economic level but also among youth.

As a personal commitment, Berlusconi pledged to push forward the European Union’s “partnership for modernization” aimed at easing visa restrictions for Russians.

The two leaders discussed as well the results of the recent G8 and G20 summits, agreeing upon the importance of maintaining the G8′s current format as a helpful instrument of debate and meetings between heads of state.

Other topics covered by Berlusconi and Medvedev were the need to revamp peace talks in the Middle East and Russia’s role in European safety.

Story from Xinhuanet

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Italy’s two biggest banks, Unicredit and Intesa San Paolo, weathered the tests best, boasting respectively at 7.8 percent and an 8.2 percent “tier one ratio” of capital after the cumulative effects of several adverse scenarios.

Banco Popolare followed with a ratio of 7.0 percent, UBI with 6.8 percent and Monte dei Paschi di Siena with 6.2 ratio, all above the EU threshold ratio of 6.0 percent.

Together, the five banks represent more than 60 percent of the Italian banking sector, according to the Bank of Italy.

“The results confirm the ability of Italian banks to absorb the impact of a significant deterioration of current macroeconomic and market conditions,” the central bank said in a statement.

The head of the Italian banking association ABI, Giuseppe Mussari, also hailed the results, saying they showed that Italian banks are “solid and prepared to face the future.”

He added: “The sector is in excellent health and exhibits a high level of resistance to exceptional shock, (confirming) the trust that families and businesses have always placed in the credit sector.”

The Australian bank Macquarie recently cited Banco Popolare as one of the banks that might be unable to resist severe shocks.

Italian banks did better than most of their peers during the financial crisis thanks to robust retail operations and limited exposure abroad, and none received state capital injections.

The tests involved a total of 91 banks in the 16-nation eurozone plus Britain, Denmark, Hungary, Poland and Sweden to determine whether they have sufficient capital to withstand shocks such as those that caused the collapse of US investment giant Lehman Brothers in 2008.

Story from AFP

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The initial bill would have banned the publication of transcripts in the media and called for up to two years in jail and fines of up to 464,700 euros (600,000 dollars).

It drew fire from the opposition, the European Union and even some of Berlusconi’s allies and prompted a one-day strike by most Italian media outlets protesting what they called the “gag law”.

The amended version of the bill allowing publication of transcripts relevant to an investigation won the backing of opposition parties represented on the justice committee with the exception of the anti-corruption Italy of Values party.

It calls for a magistrate to hold a hearing with the subjects of an investigation before authorising the publication of selected transcripts.

Berlusconi, who championed the initial bill on grounds of the protection of privacy, said Tuesday he was not satisfied with the amended version as “Italians would not be able to speak freely on the phone and Italy will not be a really civilised country.”

But key ally Gianfranco Fini hailed the new version as a victory of “common sense.”

Justice Minister Angelino Alfano said Wednesday that the lower house Chamber of Deputies would vote on the bill before the summer recess.

Another controversial provision of the original bill — a laborious procedure requiring the renewal of warrants to wiretap conversations — was also amended, with warrants to be renewed every two weeks instead of every three days.

This month a UN human rights expert said the bill threatened Italians’ freedom of expression, while the Organisation for Security and Cooperation in Europe said the bill could hinder investigative journalism.

Journalists went on strike in 2007 against similar legislation proposed and eventually abandoned by the then centre-left government.

The widespread use of wiretaps by Italian investigators prompted Berlusconi to complain recently that “we are all spied on,” suggesting that upwards of 10 million Italians have had their phones tapped — a figure disputed by experts.

Wiretaps have produced embarrassing revelations over the conduct of high-ranking government officials including the head of the civil protection agency, Guido Bertolaso, and cost Economic Development Minister Claudio Scajola his job.

Last year Berlusconi’s private life came under the spotlight with a wiretapped conversation in which an aide discussed arrangements for a call girl to spend a night with the prime minister.

Story from AFP

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The Italian government is considering selling hundreds of pieces of real estate to reduce its national debt including palaces, beaches, islands and forts with an estimated value of more than £3 billion.

Among the most expensive and picturesque assets could be the Caprera island chain, part of the La Maddelana archipelago off the north east coast of Sardinia which has 45 miles of secluded coastline surrounded by crystal waters which attracts scuba divers from around the world.

Islands in the lagoon off the coast of Venice are another possibility and could command hundreds of thousands of euros due to their proximity to the world famous city. They include Sant Erasmo, known for its market gardens, vineyards and pretty fort.

In Rome, historical buildings including the Villa Giulia museum, built on the outskirts of the city by Pope Julius III in the 16th Century, and 900 year old Norman palace in Palermo which was home to the ancient kings of Sicily, could be on the list.

The news comes as the latest figures show that Italy’s real estate market is still struggling to recover as prices remain below pre-crisis levels and are unlikely to rise until the end of next year.

The number of residential properties sold in the first half of 2010 was 30% lower than before the financial crisis began in 2008, according to Bologna based research institute Nomisma.

In the six months through to June, prices fell 1.8% from the second half of 2009, according to the study based on a survey of the 13 biggest cities in Italy.

‘Abroad, the market recovery has been felt for some months now, with investments resuming and prices picking up. The Italian market still appears to be far from a firm recovery in terms of both prices and sales, the Nomisma report says.

Prices for apartments in Rome fell to 3.2%, those in Sicily fell to 5.3%, and Milan experienced a drop to 4%, the report shows.

Italian business and consumer confidence fell in June as households grew more pessimistic amid the highest jobless rate in almost six years. Nomisma said the decline in confidence had ended a temporary pickup in late 2009, curbing the real estate market’s rebound.

With regard to the national sell off, a full list is expected to be made public at the end of the month but the properties are likely to be offered to local and regional councils first. The decision to sell comes days after cash strapped Greece considered selling off state owned assets to reduce debt.

Last month, the French government announced plans to sell off 1,700 state properties in a bid to cut the country’s heavy debts. The sale is to include castles and mansions which are regarded as ‘useless and unadapted’.

Story from Property Wire

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“An Italian downgrade is not an imminent threat, not even in the medium term,” Ioannis Sokos, an interest-rate strategist at BNP Paribas SA in London said. “Italy is under stable outlooks by all agencies, and there has been not even a slight warning with respect to any sort of downgrade risk.”

Ireland had its credit rating cut to Aa2 from Aa1 by Moody’s, which cited a “significant loss of financial strength” and the cost of bank bailouts. Moody’s has kept its rating of Italy unchanged at Aa2 since May 2002. Standard & Poor’s has been more willing to cut, slashing its rating twice in that period — in July 2004 to AA- and again in October 2006 to A+.

On April 8 Standard & Poor’s reiterated its “stable” outlook, saying Italy’s plan to cut spending and its deficit next year may be a “supporting factor” for the ratings. On May 7 Moody’s said that Italy is not among the countries most at risk from Europe’s spreading debt crisis and its credit outlook for 2010 remained stable.
Some analysts say that given the difference between S&P and Moody’s ratings on Italy, Moody’s “stable” outlook may not last.

“Considering that there is a two-notch differential between Moody’s and S&P, it would not be a major surprise if Moody’s didn’t take a look at Italy next,” Gary Jenkins, head of credit strategy at investment bank Evolution Securities Ltd. in London, said today in a note to investors.

Risk Premium

The yield premium, or spread, that investors charge to hold Italian 10-year bonds over comparable German bunds, the European benchmark, narrowed by 6 basis points to 141 basis points today. The spread between Irish and German bonds widened 8 basis points to 291 basis points.

“The market would be very surprised if any rating agency was to adversely change their outlook or rating of Italy’s debt,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate and Investment Bank in London.

On May 26, Prime Minister Silvio Berlusconi’s government passed 24.9 billion euros ($32.3 billion) of budget cuts over the next two years as part of a European effort to convince investors the region can control budget deficits after Greece’s near default. The package aims to reduce Italy’s budget gap an additional 1.6 percent of gross domestic product to bring the shortfall within the EU limit of 3 percent of GDP in 2012 from 5.3 percent last year. Ireland had the biggest deficit in the euro region last year at 14.3 percent of economic output.

“Relatively Favorable”

“Compared to other peripherals, Italy is running a relatively moderate deficit,” said Marcel Bross, an interest- rate strategist at Commerzbank AG in Frankfurt. “Within the peripheral space the sentiment is still relatively favorable for Italy from a credit point of view.”

Moody’s last week cut Portugal’s rating by two levels, citing prospects for weak economic growth and rising debt.

“We do not expect any negative rating actions on Italy unless the economic situation deteriorates further on a more general level,” said Gustav Bundgaaerd Smidth, a fixed-income analyst at Danske Bank A/s in Copenhagen.

On July 15 the Bank of Italy raised its 2010 growth forecast for Europe’s fourth-biggest economy to 1 percent from a previous estimate of 0.7 percent, saying export gains will drive the recovery as rising unemployment weighs on domestic demand. The $2.1 trillion economy has the euro region’s largest public debt at 115.8 percent of gross domestic product and must finance more than 150 billion euros in maturing bonds this year.

Story from Business Week

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Italy’s gross domestic product will expand 1 percent, more than the 0.7 percent predicted in January, the Rome-based central bank said today in a report. The country’s joblessness will keep rising “to about 9 percent,” it also said. That’s higher than the 8.4 percent in the first quarter.

Italy’s growth “will be supported by foreign demand as in similar economic cycles in the past,” the bank said. “The reviving vigor of exports has not been coupled with an improvement in domestic demand.”

The $2.1 trillion economy expanded less than economists originally forecast in the first quarter as weak consumption limited gains in exports, which were helped by the decline of the euro in the period. The currency’s slump was fueled by investors concerns that Greece’s near-default signaled a spreading regional debt crisis. The Italian Senate today passed measures to reduce the country’s budget deficit as part of a coordinated austerity plan in the euro region.

Bank of Italy Governor Mario Draghi said today in a speech delivered at the Italian Banker’s Association in Rome that the impact of the government’s budget cuts, worth 25 billion euros ($32 billion) over the next two years, can only be gauged in the “coming months.”

The Bank of Italy kept its growth forecast for Italy next year at 1 percent, according to today’s report.

Story from Bloomberg

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Italy’s central bank and the Association of Italian Banks (ABI), which held its annual meeting on Thursday, both expressed optimism over the outcome of the tests on the country’s five main lenders – UniCredit, Intesa Sanpaolo, Monte dei Paschi di Siena (MPS), Ubi bank and Banca Popolare.

Each have been tested on their ability to withstand losses in the event of an economic growth rate 3 percentage points below the European Commission’s forecasts for the next two years, and an increase in interest rates above levels reached in May during the Greek sovereign debt crisis.

The results “will confirm the high degree of resistance of the Italian industry to macro-financial shocks”, said Corrado Faissola, outgoing ABI president.

“In these difficult years, our banking system has been the bulwark of stability.”

Through lower dividend payments, disinvestments and share issues, core tier one ratios of the main Italian banks have grown by 2 percentage points since the end of 2008. Core tier one ratio is a measure of balance sheet strength.

“European government will have to be ready to intervene with adequate measures if results were to unveil weaknesses and market solutions were not available,” Mr Draghi said, calling for transparency in the methods used and comparable and uniform results between countries.

Results of the tests in Italy would be “mixed”, Mr Draghi said. “But I am confident that they will show that the wealth resources of the individual companies are adequate.”

Giuseppe Mussari, MPS chairman and newly elected president of ABI, told reporters that he expected positive results in general and described the sector’s health as excellent.

MPS has repeatedly denied analysts’ reports suggesting it would require recapitalisation.

Although Italian banks have been less exposed to the global financial crisis, they face a stagnant internal market with non performing loans at double the European average.

Mr Draghi urged banks to lend “with diligence and farsightedness”, in particular to small and medium companies.

In the three months to May, loans to companies increased 2.1 per cent over the previous quarter while lending to families rose by 5 per cent.

“Demand for credit is increasing, but there’s the impression that for many businesses demand isn’t being fully satisfied. Much work remains to be done,” Mr Draghi said.

The central bank on Thursday revised upward its GDP estimates for 2010 from 0.7 to 1.0 per cent, though it noted “wide margins of uncertainty on international recovery remain”.

Story from Financial Times

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The vote means Italy has inched closer to finally approving the 25 billion euro ($32bn; £20.8bn) plan.

It comes at one of the most testing times in Mr Berlusconi’s premiership.

The two-year plan, aimed at cleaning up public finances and reassuring financial markets, was approved by 170 to 136 votes.

The package must now be voted on by the lower house of the Italian parliament before the end of the month.

Its passage involves a second confidence vote. Berlusconi has said his government would resign if it lost such a vote – although he has a comfortable majority in the lower house.

‘Increasingly shaky coalition’

Like many European countries, Italy is struggling to lower debt and contain budget deficits amid slow growth.

Measures included in the package include delaying retirement dates by three to six months, a state salary freeze and pay cuts for high public sector earners.

There will also be a 10% cut per year in 2011 and 2012 in spending by all government ministries.

The measures provoked a wave of revolt when they were unveiled last month.

A general strike organised by the country’s largest trade union brought tens of thousands of people onto the streets in cities including Rome, Milan and Bologna in protest.

The BBC’s Mark Duff in Milan says the government coalition is looking increasingly shaky.

Mr Berlusconi’s personal approval ratings have slumped, and a new corruption scandal has tainted the government.

Meanwhile the past few months have seen the outbreak of a vicious power struggle between Mr Berlusconi and his most senior colleague and rival – the president of the lower house, Gianfranco Fini.

But, our correspondent adds, Mr Berlusconi is not a man to be dismissed lightly. He was recently quoted as saying that if he could live to be 150 he would be able to sort out all of Italy’s problems.

Story from BBC News

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In a busy day of euro zone state bond auctions on Wednesday, Italy’s sale of 6.8 billion euros of paper went smoothly apart from a 30-year issue which saw weak interest, while Germany got away 4.03 billion euros of 5-year paper without any difficulty.

Lisbon sold 877 million euros of bonds maturing in 2012 at an average yield of 3.159 percent, sharply above April’s 1.715 percent, and issued 803 million euros of bonds maturing in 2019 with the average yield edging up to 5.332 percent from 5.225 in last month’s auction of a similar maturity.

“Yesterday’s downgrade served to cheapen the (2012) bond up hugely, and this has been snapped up,” Peter Chatwell, strategist at Credit Agricole CIB said.

“The off-the-run 10-year has not been as strong and there appears to have been some selling after the auction so Portuguese spreads may remain weak in the short-term from here,” he said.

Demand for Portugal’s 2012 maturity bond exceeded the offer by 2.3 times, but came in slightly below the 2.5 times in the previous sale. On the 2019 bond, demand dipped to 1.5 times the offer from 1.8 times in June.

The two-notch downgrade by Moody’s to A1 elicited only muted market reaction on Tuesday as it made up ground on rival agency Standard & Poor’s, which still rates Portugal two grades lower at A-.

The Portuguese/German 10-year government bond yield climbed to 299 basis points, up 10 bps from the settlement on Tuesday, as German government bonds outperformed peripheral euro zone paper.

“ANOTHER HURDLE CLEARED”

“Demand was more modest, if anything a little on the tentative side. Still, on the face of it, it is a pretty solid, though not spectacular, auction,” said Orlando Green, interest rate strategist at Credit Agricole in London.

“The funding problem is receding, and this is another hurdle cleared, like Greece’s t-bill sale on Tuesday was another hurdle passed and also Italy’s successful bond sale,” Green said.

Recent market action suggests some easing of investor concern about a euro zone sovereign debt crisis.

Greece passed its first borrowing test on Tuesday since a giant EU/IMF funding deal in May, sending bank stocks and the euro higher after it easily sold 1.625 billion euros of six-month T-bills.

Athens managed to get funding, more than 10 percent of it from foreign investors, at a yield slightly cheaper than the 5.0 percent it pays to borrow under the 110 billion euro loan the European Union and the International Monetary Fund put in place to calm a crisis that shook the euro zone.

The next test for high debt euro zone nations is on Thursday when Spain auctions 2.0-3.0 billion euros of 2025 debt.

ITALY, GERMANY

Italy’s auction of three BTP bonds got away broadly in line with expectations in size and in cover ratios but with weaker interest and higher yield for a 30-year issue.

“Overall good auctions from Italy with the amount allocated at the high-end of the targeted range,” Wilson Chin, strategist in Amsterdam for ING.

“This again is a good signal to the market that the supply has been taken down smoothly with so much supply this week from the periphery and especially at the long end of the curve.”

Italy’s five-year bond was assigned 3.276 billion euros in the auction with a cover of 1.411 times, up from 1.268 in June, and a yield down slightly to 2.85 percent.

Germany’s 4.03 billion euros of five-year BOBL notes was covered 1.8 times with a yield of 1.60 percent.

“The OBL auction has been solid enough — it was a final tap in smaller-than-normal size so it was never going to be troubled,” Chatwell said.

Story from Reuters

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Alcoholic beverages and tobacco prices grew 2.2% annually in June, while clothing and footwear prices rose 1%. Housing, water, electricity, gas and other fuel prices increased 0.8%. Transport charges climbed 3.7%. On the other hand, food and non-alcoholic beverages fell 0.3%, while communications charges slipped 1%.

On a monthly basis, the CPI remained unchanged in June, after rising 0.1% in May. Food and non-alcoholic beverages prices rose 0.1% and clothing and footwear prices also grew 0.1%. Transport charges fell 0.3%.

Meanwhile, the harmonized index of consumer prices, or HICP, was up 1.5% year-on-year in June, slowing from 1.6% in May. Month-on-month, the HICP rose 0.1%. Thus, all latest figures matched a preliminary estimate released on June 30.

Story from RTT News

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The reception has been “generally favourable but they have to decide”, said the source, who spoke on condition of anonymity.

The proposed fund would be for lenders that regulators consider viable, said the source. It could group about 20 European cross-border banks, and is an alternative to a proposed bank tax, the source said.

Story from Reuters

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“We are still buying across the market,” said de Bruin, who oversees $32 billion of European government debt at F&C in Amsterdam. “In our central scenario, we expect that the nervousness around European sovereign bonds will dissipate.”

Investments in so-called peripheral nations are paying off as bonds of Portugal rallied 7.2 percent, Ireland gained 4.8 percent and Italy 2.2 percent since May 7, just before the European Union announced its 750 billion-euro ($942 billion) bailout fund for the region’s debt-laden governments. Even Greece’s securities climbed 13.4 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

While Pacific Investment Management Co., which runs the world’s biggest fixed-income fund, says the rescue only delays governments from confronting their budget woes, a growing number of money managers are snapping up European debt with historic relative yields to benchmark German bunds. F&C, London’s Baring Asset Management and UBI Pramerica SGR SpA in Milan are betting that accelerated budget cuts will reduce deficits as Europe’s economy improves.

Yields on Portugal’s 10-year bonds tumbled 74 basis points, or 0.74 percentage point, compared with bunds from a euro-era record in May through the end of last week. Italy’s yield premium slid 39 basis points since widening to 178 on June 8, the most in 13 years.

Asian Demand

While Spain’s debt was little changed since May, according to the EFFAS indexes, international investors bought 66 percent of the 6 billion euros of 10-year bonds the nation sold on July 6, the Treasury said. Investors in Asia purchased 13.3 percent even after Moody’s Investors Service said a week earlier it may cut the country’s top Aaa credit rating.

There is a “diminishing” need for the European Central Bank to continue buying the debt as part of a program tied to the regional rescue fund, ECB President Jean-Claude Trichet said at a July 8 press conference in Frankfurt after policy makers left the benchmark interest rate at a record low 1 percent.

Pimco, the Newport Beach, California-based firm that runs the $234 billion Total Return Fund, isn’t convinced a three- year, 110 billion-euro Greek aid accord, which preceded the EU’s May 10 plan, will prevent a default from roiling the region.

‘Unsolved Problem’

“This package delays addressing that problem by three years,” said Andrew Bosomworth, the Munich-based head of portfolio management at Pimco. “There’s an unsolved problem of solvency. So long as that uncertainty is out there, we don’t think it makes much sense to be overly exposed in other countries because there’s contagion risk.”

Bulls say the Greek and EU packages provide investors with enough confidence to prevent yields from soaring as governments cut spending amid signs of economic improvement.

Italian manufacturing rose 1 percent in May from April, and Spain’s climbed for a third month, government reports showed in the past two weeks. Ireland’s Central Statistics Office said June 30 that the economy expanded for the first time in more than two years in the first quarter.

“There is a tendency from the outside to be excessively pessimistic,” Trichet said at the press conference. “The figures don’t confirm this pessimism.”

The euro has strengthened 5.8 percent since falling to a four-year low of $1.1877 on June 7. The currency traded at $1.2560 as of 10:36 a.m. in London.

Costs Decline

Portugal’s borrowing costs fell when it sold 762 million euros of six-month bills on July 7, five days after the government said it aims to meet EU limits for a budget deficit of 3 percent of gross domestic product in 2012, a year earlier than the previous plan and down from 9.3 percent last year. The securities maturing in January 2011, were issued at an average rate of 1.947 percent, down from 2.955 percent at a May 5 auction, data from the debt management agency showed.

Investors such as UBI’s Emilio Franco, who helps oversee about $46 billion, say the negative sentiment that drove Portuguese yields to 349 basis points more than bunds, the most since the euro’s debut, and above the average of 51 basis points over the past five years, was unwarranted. The spread was 275 basis points on July 9.

Franco correctly predicted in December that the German 10- year bund yield would fall to a record 2.5 percent by the end of June from about 3.2 percent at the time. Now he plans to buy at Spain’s bond auctions.

Berlusconi’s Budget

Investors demanded an extra 206 basis points to hold Spanish 10-year debt rather than German securities at the end of last week, down from a peak of 221 basis points on June 16.

Two-year Italian notes yield 106 basis points more than bunds of similar maturity, down from 139 on May 25, when Prime Minister Silvio Berlusconi won cabinet approval for about 25 billion euros of budget cuts to shrink the deficit to 2.7 percent of GDP in 2012, from 5.3 percent last year. The yield on the 2.5 percent security due July 2012 fell to 1.86 percent from 2.13 percent as bond prices rose.

“I’ve been buying some Italy on the basis that the underlying debt dynamics appear to be somewhat better” than for other euro nations, said Toby Nangle, who helps oversee about $43 billion as head of asset allocation at Baring.

Ireland’s bonds are attracting Fideuram Asset Management in Dublin, part of Banca Fideuram SpA, which oversees 70 billion euros in assets. “We still have Irish bonds in our portfolio and we have also been buying some of them,” said Simone Pecoretti, the firm’s head of fixed income. “We don’t see an impending risk in the very short term.”

Spread Narrows

The spread between 10-year Irish bonds and bunds was 262 basis points last week, from 306 basis points on May 7, the widest in the euro era. The yield on the 4.5 percent security due April 2020 was 5.31 percent on July 9, from 5.93 percent.

Europe’s debt crisis was triggered after Greek Prime Minister George Papandreou’s socialist Pasok party won elections in October and said the deficit was more than 12 percent of GDP, twice the previous government’s estimate. That sparked a surge in bond yields as Standard & Poor’s and Moody’s cut the nation’s ratings to below investment grade.

The Greek economy may contract 4 percent this year, the median of 10 analyst estimates compiled by Bloomberg showed. Unemployment topped 12 percent in February, the most in at least six years.

Stress tests on 91 of Europe’s biggest banks assume losses of 17 percent on Greek bonds, said two people briefed on the talks who declined to be identified because the details are private.

Greek Demand

Greece, which will sell 1.25 billion euros of six-month bills tomorrow, is seeing increased demand for its debt. The yield on the 4.6 percent bond due September 2040 fell to 9.37 percent last week from 10.25 percent June 28 as the price rose to 52.45. The September 2037 security was at 52.39. Both traded at less than 50 percent of face value as recently as June 28.

The spread between 10-year Greek bonds and bunds was 764 basis points last week. It reached 965 basis points on May 7.

“We added to a small exposure in the long end when prices on the 2037 and 2040 bonds went below 50,” said James Moylan, managing director, head of credit trading at Conduit Capital Markets, a London-based fixed-income brokerage. “At those levels the trade is beginning to look better.”

Story from Business Week

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• 10 year bonds, baring asset management, bond yields, budget cuts, budget woes, government debt, international investors, relative yields, sovereign bonds

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The Italian state is also one of the most affected by the trade in counterfeit goods, losing €5.0 billion ($6.3 billion) in tax receipts, the head of Confindustria Emma Marcegaglia said in comments during an event aimed at raising awareness on forgery.

“A decision at the European level is needed, because the flow of counterfeit goods is shifting towards Northern Europe. We need to fight together against forgery,” Marcegaglia said.

“Unfortunately, (forgery) has been growing continuously,” said European Affairs Minister Andrea Ronchi.

Those buying counterfeit goods “are doing a favour to organised crime, to the Camorra, to the Mafia and to the ‘Ndrangheta,” he said, citing the three largest Southern Italian crime syndicates.

The turnover from the counterfeit industry is more than €7.0 billion per year in Italy, according to the government’s body against forgery.

In 2009, the total worth of seized counterfeit items grew to €1.15 billion from €690 million in 2008.

Story from Business Report

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• business report, counterfeit goods, counterfeit industry, crime syndicates, forgery, italian crime, mafia, tax receipts

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The 30 second promo, called “The Magic Of Italy”, features the voice of the former cruise ship crooner extolling the beauty and benefits of having a “staycation”.

On the video, Mr Berlusconi, 73, can be heard describing Italy as a “unique country, made of sea and sun but also history, culture and art; an extraordinary place that you have yet to discover”.

As he speaks, a camera flies over Italian monuments and sites such as Michelangelo’s statue of David in Florence’s Accademia Gallery, Siena and Venice.

The majority of Italians tend to go abroad for their summer holidays but spiralling costs and the poor economy has meant more people are staying put this year to save money.

However, Mr Berlusconi is actively encouraging them to get out and about to explore the beauty of Italy and visit places that foreign tourists may well be familiar with but Italians are not.

It is the first time that a serving Italian prime minister has appeared in a TV campaign promoting domestic tourism and it is also believed to be the first for any leader.

In his advert, which will be screened on TV over the next few weeks, Mr Berlusconi adds: “Use your holidays to get to know Italy better, your magical Italy.”

Story from The Scotsman

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• domestic tourism, holidays at home, italian monuments, italian prime minister, magic of italy, poor economy, silvio berlusconi, summer holidays

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