Italy eyes 'serious' austerity as markets keep watch

(ROME) - Italy's economy minister called for "serious" austerity on Tuesday amid political infighting and market tensions as Rome prepares to unveil budget measures worth over 40 billion euros ($57 billion).

"I have a very serious and responsible austerity plan," Giulio Tremonti told reporters ahead of a meeting with Prime Minister Silvio Berlusconi as the government puts the finishing touches on a budget package due on Thursday.

"It will be austerity in the interests of Italy and of Italians," he said.

The plan aims to bring Italy's public deficit to just 0.2 percent of gross domestic product (GDP) by 2014 from 4.6 percent in 2010. A smaller round of austerity approved last year sparked a wave of social protests.

The centre-right government is now in a weaker position after suffering defeats in local elections and a round of referendums and the backdrop of Greece's sovereign debt crisis has investors on edge across the eurozone.

Italy came out of the global economic crisis in better shape than expected and its public deficit was lower that in many other European countries, but its public debt is one of the biggest in the world at around 120 percent of GDP.

Ratings agencies Moody's and Standard and Poor's have both warned they could downgrade Italy's sovereign credit rating due to doubts about the government's ability to slash the deficit and concerns about the economy's low growth rate.

The Italian economy grew by just 0.1 percent in the first quarter this year.

The plan reportedly includes an increase in the minimum pension age for women and the extension of a freeze on salary increases and hiring in the public sector imposed last year until 2014, ANSA news agency reported.

Another reform would stop ministers from getting an extra salary for being in the cabinet on top of their wage as members of parliament.

The main FTSE Mib index on the Milan stock exchange moved into positive territory after details of the plan were leaked, but some bank shares were still sharply down with Banca dei Monti di Paschi di Siena 5.15 percent lower.

Italy earlier on Tuesday had to pay higher rates to raise fresh funds on debt markets, with the yield on 10-year bonds rising to 4.94 percent compared to 4.73 percent previously, a reflection of perceived investor risk.

The difference in the yield between Italian government bonds and German bonds has risen in recent days to record highs since the creation of the euro, amid fears of a wider contagion from the Greek debt crisis.

"The locusts of speculation are only waiting for the right moment to jump on the prey that shows the first sign of weakness," Berlusconi told parliament last week, assuring deputies that his government would show "discipline".

But the cracks have been showing inside Berlusconi's coalition.

Junior defence minister Guido Crosetto -- a key Berlusconi loyalist -- on Sunday accused Tremonti of plunging the economy into "a coma" and said the austerity plan "should be analysed by a psychiatrist".

Newspapers on Tuesday even said Tremonti could resign over austerity.

"It's an adventurous but hardly unrealistic hypothesis," Stefano Folli, a political commentator wrote in a column for business daily Il Sole 24 Ore.

"There is a very serious risk that financial markets turn against Italy as soon as they get an impression that Tremonti's austerity has been abandoned."

Folli said there was no strong base of support for Tremonti within government at the moment, adding: "We will keep walking on the wire."

Umberto Bossi, leader of the populist Northern League party, has said he is against increasing the pension age. He has hinted in recent weeks that he could pull out of the ruling coalition if his demands are not met.