Italy's Berlusconi wins confidence vote (AP)

By VICTOR L. SIMPSON and ALESSANDRA RIZZO, Associated Press Victor L. Simpson And Alessandra Rizzo, Associated Press – 14?mins?ago

ROME – Premier Silvio Berlusconi kept his job Friday after a crucial confidence vote in Parliament, but financial analysts and critics were skeptical that would resolve Italy's increasingly severe economic troubles.

Berlusconi's conservatives won in a 316-301 vote in Parliament's lower house, barely above an absolute majority in the 630-seat house. After days of tension, the premier's allies clapped with relief when the vote was announced, while opposition lawmakers described e as a Pyrrhic victory.

Protesters in Rome chanted anti-government slogans, shouting "Shame!" and hurling eggs toward Parliament. Italian TV reports from Milan showed about 20 young people trying unsuccessfully to enter a building where Goldman Sachs has its office, and spraying red paint on the entrance.

"The best signal that Italy could have sent to the markets would have been to boot Mr. Berlusconi out, but it has failed to do so," said Sony Kapoor, managing director of Re-Define an Economic Think Tank, shortly after the vote. "With Mr. Berlusconi still at the helm, there is nothing that Italy can do from within that will restore market confidence."

Berlusconi has been weakened by sex scandals, criticized for his handling of Italy's worsening economy and facing repeated calls for his resignation from his political rivals, labor unions and parts of the business community that once considered him their savior.

Even some of his own allies have openly expressed disappointment, with at least two deserting the crucial vote Friday. Had he lost, Berlusconi would have been forced to resign about 1 1/2 years before the end of his term in 2013.

"Berlusconi is the last of the Mohicans, the only one who believes that with 316 votes he can solve his problems," said political rival Pier Ferdinando Casini, one of many who see Berlusconi's near 20-year grip on power coming to an end.

In the meantime, popular anger has been rising. Rome is girding for major protests Saturday by demonstrators known as the "indignati," part of worldwide rallies targeting governments, banks and financial institutions.

Italy has found itself increasingly embroiled in Europe's debt crisis over the past few months. It's debt burden — about 120 percent of its national income — is second only to Greece in the 17-nation eurozone.

Three ratings agencies have downgraded Italy's public debt, citing the country's political gridlock and low growth prospects. Berlusconi's government has been forced to enact a series of austerity measures to assure the markets that a strategy is in place.

However, investors remain skeptical that there's the necessary political will to push through the big spending cuts and tax increases — fears that have driven Italy's borrowing costs ever higher. Italy is considered now more of a financial danger than Spain partly because Berlusconi's government has backtracked on several reform proposals.

The European Central Bank has been buying up Italian bonds in the markets for weeks, and without that, Italy could have found its borrowing rates rise to an unsustainable level.

Berlusconi has steadfastly held onto power despite the scandals and four criminal trials in Milan. He has always maintained his innocence and blamed what he says are overzealous, left-leaning prosecutors bent on ousting him.

He insists there is no alternative to his government and called the vote Friday an "ambush" by the opposition.

This week, Central Bank chief Mario Draghi, who takes over the helm of the European Central Bank on Nov. 1, urged the government to act more quickly to implement reforms that can spur growth.

Draghi warned that otherwise the rising cost of borrowing to service national debt will eat up "no small part" of the austerity package already approved by Parliament last month.

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Analysis: Uncertainty surrounds Italy's deficit-cutting plan (Reuters)

ROME (Reuters) – Opaque pledges and a lack of detail on measures to speed up deficit reduction plans risk undermining Italy's hopes of winning a reprieve from financial markets that have pushed the country to the brink of crisis.

Desperate to stop market panic that has sent Italian bond yields soaring to 14-year highs, Italian Prime Minister Silvio Berlusconi hastily announced plans on Friday to speed up reforms and balance the budget by 2013, a year ahead of schedule.

Initial reaction from analysts and the European Union's top economic official was positive, but whether the pledges convince the European Central Bank to bolster Italy by buying its bonds, or calm market tensions, may hinge on the specifics of the plan.

So far, few seem to know what the plan will include. Indeed it is unclear if the government itself knows.

"The decision to bring forward the balancing of the budget is a positive step but we need a lot more detail," said Raj Badiani of IHS Global Insight, warning that the promised reforms are unlikely to happen overnight.

"The problem is Italy doesn't have time right now and the reforms they announced are easier said than done."

Economy Minister Giulio Tremonti said on Friday there would be no new austerity measures beyond those announced in a 48 billion euro package passed last month which contained cuts to local government funding, health charges and vague plans for a mix of welfare cuts and tax measures.

That programme was widely criticised for delaying the bulk of measures until after elections in 2013 and Tremonti said it would be accelerated but offered no specifics about a plan which in any case still had to be fleshed out in important areas.

ECB sources say the bank -- which is due to discuss later on Sunday whether to buy Italian bonds -- remains divided on the issue and even some of those who favor the move want Italy to do more to frontload its austerity measures.

Some proposals, like a fee for non-urgent medical visits and tests, quickly sparked a popular backlash and prompted talk of alternatives. Even without any such backtracking, the funding cuts make up only a relatively small portion of the plan.

For the bulk of the savings, the government will ask parliament to approve a so-called "delega fiscale" or "tax delegation law" and "delega assistenziale" or "welfare delegation law" -- something of a political blank cheque.

The laws allow parliament, which is delaying its summer break to continue sitting next week, to "delegate" to government the job of drawing up tax and welfare measures worth, in this case, up to about 20 billion euros, within a certain time.

Only after that, would the government nail down the measures and get them approved by parliament.

In a sign that nothing concrete has been finally settled, daily Corriere della Sera on Sunday said government experts had decided the welfare system could not contribute the additional funds needed and were now eyeing the pensions system.

LACK OF CREDIBILITY

Whether deficit reduction measures, even brought forward by a year, will do much to address Italy's major economic problem of declining productivity and weak growth is also questionable.

Italy already runs one of the lowest budget deficits in the euro zone at 3.9 percent of GDP this year, which together with its conservative banking system and high rate of private savings, has kept it largely clear of the euro zone debt crisis until last month.

Ratings agencies have been much more worried about the chronically weak growth which makes it impossible to catch up with and contain a steadily increasing public debt burden which now amounts to 120 percent of gross domestic product.

Successive governments have managed the debt successfully, running primary budget surpluses, excluding interest rate payments, to help pay debt servicing costs estimated in a UBS research note last week as running at 4 percent of GDP.

However as the UBS analysts wrote: "The recent turbulence is not about fundamentals. It looks more like a crisis of confidence."

Analysts fear that most of the cuts, or any tax hikes, will at any rate bite only after scheduled elections in 2013, doing little to restore investor confidence in Italy.

"The only real decision is that of bringing forward the balancing of the budget to 2013, but that doesn't seem very credible because 2013 will be an election year," said Tito Boeri, economics professor at Bocconi university in Milan.

"They should have brought it forward to 2012, when the impact of the measures announced so far is quite small."

Berlusconi's remaining pledges face the risk of not being implemented at all.

A decision to put the balanced budget principle into the constitution, for example, appears aimed at convincing markets that fiscal discipline will be binding from now on.

But Berlusconi has not said exactly what he means by the principle, although the government has previously spoken of a rule requiring budgets to be kept in balance unless new borrowing is required for investment spending.

The pledge is in any case likely to take at least a year due to the complicated parliamentary procedure needed for constitutional changes -- and even then, risks being ignored in practice when it is in the constitution.

Tremonti's promise of long-awaited reform to liberalise Italy's rigid and inefficient Labor market -- seen as vital to getting more young people back into secure, long-term employment -- has yet to be discussed with unions or employers.

Berlusconi last week promised a wide ranging reform pact with unions and employers covering areas ranging from cutting red tape to reducing the cost of government but any firm proposals will have to wait for September.

Rather unhelpfully for the government, Italy's biggest and most powerful union CGIL's first response to Berlusconi's pledges was to declare that any deal with his government was impossible and that his measures were "killing the country."

Analysts, predictably, remain sceptical.

"Implementation risks are mostly related to how the reform agenda (particularly Labor market reform) will eventually shape up -- no details have been provided on this front, therefore a judgment on the effectiveness of the reform agenda is premature at this stage," UniCredit economist Chiara Corsa said in a note.

(Additional reporting by Silvia Aloisi in Milan, editing by Mike Peacock)

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Italy's Berlusconi seeks to calm fears over crisis (Reuters)

ROME (Reuters) – Prime Minister Silvio Berlusconi sought on Tuesday to calm fears that Italy could be swept into a full-scale financial crisis as the center-left opposition pledged to help parliamentary approval of debt-cutting measures.

"For us, for Italy, this is certainly not an easy moment," Berlusconi said in a statement that followed a chaotic morning on financial markets in which Italian 10-year bond yields climbed past 6 percent, their highest level in over a decade.

Economy Minister Giulio Tremonti left a meeting of euro zone finance ministers early to return to Rome to wrap up approval of a 40 billion euro ($56 billion) package of austerity measures expected to be passed in parliament in the coming days.

"The actions under discussion in parliament will accelerate the reduction of the debt. Already this year, we will bring the primary balance into significant surplus," Berlusconi's statement said.

"The crisis is pushing us to accelerate the process of correction extremely rapidly, to strengthen its content, to fully define further steps to bring the budget into balance by 2014."

Opposition parties said that despite objections to parts of the package, which cuts funding to local government and health services and delays retirement, they would support parliamentary approval of the bill by Friday so that it would be passed by the time markets open on Monday.

With Italy sitting on 1.6 trillion euros of outstanding government bonds, any increase in borrowing costs could severely disrupt efforts to cut a debt mountain equivalent to 120 percent of gross domestic product.

Earlier, the premium investors demand to hold Italian debt rather than benchmark German bonds widened to a record 350 basis points. Bank shares also dropped heavily before markets picked up following Tremonti's return home.

"SACRIFICES"

"Any delivery from the government on the austerity package, any good news in that respect, is very, very positive. So if politicians are getting their act together, it's absolutely good news," said Royal Bank of Scotland analyst Paola Biraschi.

As the morning panic on the markets eased, the 10-year Italian/Bund spread dropped back to 288 points, 15 basis points tighter on the day, after an auction of short-term bills (BOTs) passed off without any serious problems.

Italy, the euro zone's third largest economy, has largely avoided the turmoil hitting Greece, Portugal and Ireland, thanks to a relatively modest budget deficit, a conservative banking system and a high level of private savings.

But it has been targeted over worries about the sustainability of its mountainous public debt burden, raising the threat of a crisis which could potentially overwhelm the euro area and break up the single currency.

Tremonti has overseen a four-year, 40 billion-euro austerity package designed to keep the government on track to meet a target of cutting the public deficit from 3.9 percent of GDP in 2011 to bring it into balance by 2014.

With the opposition ready to support the package, a number of smaller amendments were discussed late on Tuesday, including easing rules on amortization of infrastructure assets held by private concessionaires and changes to tax and pension measures.

The changes would see planned tax hikes on holders of financial instruments eased for small investors, while rules on inflation adjustment for pensions would be weighted against higher incomes and in favor of lower and middle incomes.

The government was also working on a measure that would ensure that 15 billion euros of fiscal measures penciled into its austerity plan were cemented into the final package.

Tremonti has faced reluctance and even outright resistance from some in the government worried about the electoral impact of unrelenting austerity but this week's crisis appears to have overcome such resistance.

In a gravely worded statement, Berlusconi, who normally exudes optimism and who has hitherto boasted of his government's success in keeping out of the crisis, said Italy had overcome even more difficult moments in its past.

"We must be united, cohesive in our common interest, conscious that the efforts and sacrifices of a brief period will correspond to permanent and secure gains," he said.

Markets plunged on Friday after a newspaper interview in which Berlusconi criticized the sometimes abrasive Tremonti for not being a "team player," a remark which underlined persistent tensions in the government.

(Additional reporting by Francesco Guarascio in Brussels, Ian Simpson in Milan, Giuseppe Fonte in Rome; Editing by Alison Williams)

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