Monti will lead talks with unions and employers in a final round of negotiations beginning tomorrow. Decision makers meanwhile warned against complacency after delivery of the final element of Greece’s 130 billion-euro ($171 billion) bailout package and the completion of the world’s largest sovereign-debt restructuring last week.
“Optimism should not give us a sense of comfort or lull us into a false sense of security,” International Monetary Fund Managing Director Christine Lagarde said in a speech at the China Development Forum in Beijing yesterday. “We cannot go back to business as usual,” she said, urging vigilance on oil prices, debt levels, and the risk of slowing growth in emerging markets.
An easing of the crisis offered breathing room for Monti to seek an Italian labor-market overhaul and for euro-area ministers aiming to bolster euro bailout funding before a meeting at the end of the month. Still, urgency was underscored by an IMF warning that the Greek bailout held “exceptional risks” that could prompt a “disorderly” exit from the monetary union unless additional help is prepared.
‘Sovereign Default’
“The materialization of these risks would most likely require additional debt relief by the official sector and, short of that, lead to a sovereign default,” IMF staff wrote in a report released March 16. “In the absence of continued official support and access to” refinancing by theEuropean Central Bank, “a disorderly euro exit would be unavoidable,” it said.
With billions of euros committed to hold Greece afloat and investors looking to see whether contagion could spread to Spain or Italy, the fragility of rescue efforts were reflected in bond yields last week. Spain’s 10-year yield climbed 20 basis points to 5.20 percent, the second weekly gain, while the yield on similar maturity Italian debt rose three basis points to 4.86 percent.
Investors have been encouraged by the Italian prime minister’s efforts to rein in the country’s debt since his government of non-politicians replaced Silvio Berlusconi’s administration last year.
Monti’s labor overhaul will include a revision of firing rules and an expansion of jobless benefits. The rules, which will distinguish between workers removed without just cause and those fired for disciplinary or economic reasons, are among the most contentious. Under article 18 of the Italian labor code, employers have to compensate and rehire and worker ruled to have been fired without just cause by a labor court.
Month’s End
Monti met with Confindustria head Emma Marcegaglia, Labor Minister Elsa Fornero, CGIL union leader Susanna Camusso, CISL union chief Raffaele Bonanni and UIL union head Luigi Angeletti on March 17, a spokesman for Confindustria said. The Italian leader has said he wants to pass labor legislation by the end of the month.
“We’ll get an agreement within about a week, although there may be some small changes to the present proposal before it’s all done,” Erik Nielsen, chief global economist at UniCredit SpA (UCG) in London, wrote in a note to clients.
Even as focus shifted beyond Greece to other parts of the euro area, the IMF’s continuing concern about the Greek package illustrated the difficulty of implementing changes that officials in Brussels and Athens had been negotiating for months. Greece remains “accident prone,” the Washington-based institution’s staff said in the report.
Greek Election
The IMF reduced its contribution to the second Greek bailout because the operation poses what staff called “unprecedented financial risks” to its finances. One of the risks identified was the Greek election, to be held in April or May.
Lagarde has pushed European governments to boost their bailout fund in an effort to protectSpain and Italy from contagion. Euro finance ministers may decide to increase the region’s crisis fund to a total capacity of 692 billion euros when they meet on March 30, a euro-area official said March 16.
The ministers, who will meet in Copenhagen, are weighing what to do with the temporary European Financial Stability Facility and its permanent successor, the European Stability Mechanism. The 692 billion-euro figure represents the most attainable compromise between 500 billion euros, if policy makers change nothing, to a maximum of 940 billion euros, the official said.
On March 16, Chancellor Angela Merkel left the door open to boosting the euro-area backstop, saying a decision on reinforcing the firewall will be made before IMF meetings next month. Ministers have discussed “combination possibilities” for the EFSF and the ESM ahead of their meeting.
“What’s clear is that we need to settle on a position with a view to the IMF’s spring meeting because the topic will surely come up and because there have been offers by the international community,” Merkel said. “You can count on us setting the course by the end of March.”
To contact the reporter on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
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