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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Mystery surrounds killing of Libyan rebel army head (Reuters)

BENGHAZI, Libya (Reuters) – Libya's rebel military commander was shot dead in an incident shrouded in mystery, dealing a blow to the Western-backed forces struggling to topple Muammar Gaddafi.

Rebels said Abdel Fattah Younes, long a member of the veteran leader's inner circle before defecting in February, was shot by assailants on Thursday after he had been summoned from the battlefield for unspecified talks with other rebel leaders.

The killing of such a senior figure is an embarrassment and a setback for the rebels regardless of who was responsible -- Gaddafi agents apparently able to strike deep in rebel inner circles, or his own side. There are known to be stark divisions between Gaddafi defectors and those who never worked with him.

The rebels did not say who killed Younes or where. His death coincided with a new rebel offensive in the west and further international recognition for rebels, which they hope will help unfreeze billions of dollars in Libyan state funds.

On Friday, weeping relatives and supporters brought his coffin into the main square of the rebel stronghold of Benghazi to mourn him.

"We got the body yesterday here (in Benghazi), he had been shot with bullets and burned," Younes's nephew, Abdul Hakim, said, crying as he followed the coffin through the square.

"He had called us at 10 o'clock (on Thursday morning) to say he was on his way here."

RUMOURS OF SECRET TALKS

Officials would not give details of why Younes had been recalled to Benghazi from the front line near the oil port of Brega for questioning. Rumors had circulated in Benghazi that he had held secret talks with the Gaddafi government.

"If the Rumors that General Younes was feeding information to Gaddafi were there then it would make sense that some rogue elements might attempt to assassinate him," said Alan Fraser, an analyst with London-based risk consultancy AKE.

Rebel defense minister Omar Hariri told Reuters his death was still being investigated and the loss would be great.

In Benghazi relatives vowed allegiance to the rebels' political leader.

"A message to Mustafa Abdel Jalil: We will walk with you all the way," nephew Mohammed Younes told hundreds of mourners in the main square.

But at the funeral later, worried mourners expressed fears he may have died at the hands of other rebels.

Seraj, a soldier who described himself as a relative, said he had heard that Younes and two other army officials killed with him had gone without a fight with men who had summoned them to Benghazi. "Later we heard that he was killed," he said.

Nephew Hakim said another coffin brought into the square by a crowd of men, some in military fatigues and some with rifles, held the body of one of the other men killed with Younes.

"It seems this was an assassination operation organized by Gaddafi's men," said London-based Libyan activist Shamis Ashour. "There certainly was treason, a sleeping cell among the rebels."

"The alternative, which is equally possible," said another analyst, Shashank Joshi, "is summary execution by rebels, an internal act of decapitation by the rebels themselves."

Joshi, of London's Royal United Services Institute, said this explanation would highlight divisions in rebel ranks already known to exist, and put a question mark over the rebels' reliability as partners for Western states.

"All these things would humiliate governments that have supported the rebels. Particularly Britain, which came late to the fray, partly for reasons like this," he said.

One rebel commander said Islamists may have been to blame.

Libyan state TV named a rebel it said had killed Younes.

Younes, from eastern Libya where the rebels are strongest, was Gaddafi's interior minister but swapped sides to become the military chief in the rebel Transitional National Council, whose political leader Jalil announced his death.

Jalil said the killers were still at large but added:

"The head of the armed cell, to which the accusing finger points and a member of which carried out this individual cowardly crime, has been arrested." He gave no details.

Younes, who was involved in the 1969 coup that brought Gaddafi to power, was not trusted by all rebel leaders due to his previous role in cracking down on dissidents.

CAMPAIGN BLOW

His death is likely to be a severe setback to a movement that has won the backing of some 30 nations -- most recently Britain and Portugal -- but is laboring on the battlefield.

Hariri, the rebel defense minister, visited the front line in western Libya on Friday. At a nearby checkpoint he told Reuters Younes's death was still being investigated.

"Of course this will have an impact on the rebels, after all we have lost a key leader," he said. "But they will recover, and there will be other leaders."

Analyst David Hartwell of IHS in London said:

"He was one of the few credible senior opposition military commanders and he has been a key figure in helping stabilize and re-organize rebel fighters."

Fighters on the front line near the town of Misrata said they viewed Younes as a martyr and would avenge his death.

"It will be an extra motive for us in the fight against the tyrant," said Khaled al-Uwayyib.

Rebels took swathes of Libya early on after rising up in February to end Gaddafi's 41 years of domination of the oil-producing North African state but have made few recent advances despite the support of NATO air strikes.

They said they had seized several towns in the Western Mountains on Thursday but are yet to make a major breakthrough.

A rebel commander near Ghezaia told Reuters on Friday that around 100 insurgents had taken control of the town, from which Gaddafi forces had dominated plains below the mountains.

Reuters could not go there to confirm the report as rebels said the area could be mined. But looking through binoculars from a rebel-held ridge near Nalut, reporters could see no sign of Gaddafi's forces in Ghezaia.

Another rebel commander said the settlements of Takut and Um al Far had also been seized.

With prospects fading for a negotiated settlement, the five-month-old civil war will grind on into the Muslim holy month of Ramadan in August.

Nick Witney, analyst at the European Council on Foreign Relations in Paris, said the West had hoped for a "nice simple conflict" with right prevailing, but this had ignored Libya's nuanced tribal-based politics.

"It was a brave and right thing to do," he said. "But I feel we've lost the moral high ground a bit and wandered into something that will be prolonged and messy, but we're not in a position to sort out."

(Additional reporting by Michael Georgy near Ghezaia; Mussab Al-Khairalla in Misrata; Alexandria Sage in Paris; Samia Nakhoul, Avril Ormsby and Clare Kane in London and Missy Ryan in Tripoli; writing by Richard Meares; editing by Andrew Roche)

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