ECB president Jean-Claude Trichet stepped up warnings over Italy's strained public finances today, telling the struggling centre-right government it must act quickly to reassure nervous markets.
Prime minister Silvio Berlusconi, hit by a renewed bout of scandal this week, has caused growing alarm over the failure of his divided government to pass clear measures to cut back Italy's €1.9 trillion debt mountain.
Speaking after a week of steadily rising market pressure on Italian bonds, Mr Trichet repeated that the government had to meet last month's pledge of a clear plan to balance the budget by 2013 and pass reforms to boost Italy's stagnant economy.
"This is absolutely decisive to consolidate and reinforce the quality and the credibility of the Italian strategy and its creditworthiness," he told a conference in the northern Italian town of Cernobbio.
The European Central Bank, which has been buying Italy's bonds in the market to try to hold down yields and stop its borrowing costs spiralling out of control, has been stepping up warnings that Rome must act quickly.
There has been some speculation that it might reduce its purchases to put pressure on Rome to act more quickly to pass a much disputed €45.5 billion package of austerity measures now going through parliament.
However, any sign of the ECB cutting back its bond-buying programme would risk triggering a market selloff that could tip the euro zone's third economy into a Greek-style emergency.
According to participants at a closed-door session in Cernobbio, Mr Trichet declined to speak about the programme.
"I'm not going to tell you what we're doing on bond buying but we have a meeting next week," Mr Trichet told the conference, according to three different witnesses, apparently referring to next week's regular Governing Council meeting.
Underlining the growing urgency of the situation, the premium investors demand to hold Italian debt rather than benchmark German bonds rose yesterday to 331 basis points, the highest since the ECB started buying Italian paper in August.
Yields on 10-year Italian bonds ended the week at 5.29 per cent, creeping back up towards the 7 percent level generally regarded as unmanageable.
Italian president Giorgio Napolitano said successive governments had failed to prevent a mountainous public debt from getting out of control, and swift action was essential.
"We have hesitated from resolutely and coherently addressing constraints that should have been loosened and broken from the heavy weight of accumulated public debt," he told the meeting.
Reuters