Italy's Monti in austerity race as market pressure grows (Reuters)

ROME (Reuters) ? Prime Minister Mario Monti faces a testing week finalizing tax and pension plans aimed at shoring up Italy's strained public finances with markets pushing the euro zone's third largest economy close to a debt emergency that could overwhelm the bloc.

Monti is expected to unveil measures on December 5 that could include a revamped housing tax, a rise in sales tax and accelerated increases in the pension age unless pressure from the markets forces him to act more quickly.

Already borrowing costs have returned to the dangerous levels which triggered the collapse of former Prime Minister Silvio Berlusconi's center-right government, with yields on 10 year bonds ending last week at more than 7.3 percent.

Italian yields are now in the territory that forced Greece, Italy and Portugal to seek international bailouts and an auction Tuesday of up to 8 billion euros (?6.86 billion) of 10 year BTP bonds will be a crucial test.

Friday, Italy paid a euro lifetime high yield of 6.5 percent to sell new six-month paper, a level which analysts said cannot be maintained for long without pushing a public debt amounting to 120 percent of gross domestic product out of control.

Italy, Europe's second biggest manufacturing power, would be far too big for existing bailout mechanisms and default on its 1.8 trillion euro debt would probably destroy the euro.

A team from the International Monetary Fund is expected in Rome this week to evaluate the state of the economy, a mark of growing concern about the effect of the crisis on the world economy.

Monti outlined the broad thrust of his reform plans earlier this month, promising a mix of budget rigor and reforms to stimulate economic growth and has stuck to Berlusconi's pledge to balance the budget by 2013.

But with growing signs that Italy's chronically sluggish economy could be entering recession, he has come under pressure to provide concrete details quickly.

The measures outlined so far are broadly in line with directions the European Central Bank gave Berlusconi's government as the price for supporting Italian bonds in the market when the crisis began to deepen in August.

As well as loosening job protection measures, privatizing local services and opening up professions to more competition, additional budget measures estimated by Italian media at up to 15 billion euros could be announced.

PRESSURE

Monti can take some comfort from surveys showing broad popular support for his technocrat government but austerity measures have yet to bite deeply and surveys also show a mixed picture on individual austerity measures.

A poll in the business daily Il Sole 24 Ore Sunday showed 83 percent support for plans to ease rules that protect those on permanent job contracts but which discourage employers from taking on full time staff and leave many workers in temporary jobs with few rights.

Almost 89 percent favored a tax on large fortunes but only 32 percent were in favor of reintroducing a housing tax scrapped by Berlusconi in a last minute campaign pledge before the 2008 election.

A separate survey in the Corriere della Sera daily showed 72 percent opposed to an increase in the pension age, a deeply sensitive issue in a country with a rapidly aging population.

On pensions, the government is expected to bring forward an increase in retirement ages which is already planned and a wider reform is possible in the coming weeks.

Il Sole 24 Ore said a deeper reform to so-called seniority pensions, which allow workers to retire earlier based on the number of years they have paid contributions, could be passed by Christmas after talks with unions.

The revamped housing tax, known as ICI, is expected to be based on revised land registry valuations that would be closer to market prices and it could be scaled progressively to raise more from large property holdings.

Scrapping the tax cost the Treasury around 3.5 billion euros a year, according to estimates by former Economy Minister Giulio Tremonti.

Other ideas under consideration include raising the value-added tax band in bars and restaurants, which currently stands at 10 percent and lowering the maximum limit on which cash can be used to crack down on widespread tax evasion.

There has also been speculation that a form of wealth tax, which has been firmly rejected by the center-right, could be introduced.

(Reporting By James Mackenzie; editing by David Stamp)

Source: http://us.rd.yahoo.com/dailynews/rss/europe/*http%3A//news.yahoo.com/s/nm/20111127/bs_nm/us_italy

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