Bad sale of Italian debt adds to Monti's headaches (Reuters)

ROME (Reuters) ? A punishing sale of Italian debt on Friday was not just bad news for the country's finances and the euro zone as a whole but increased political problems for the new technocrat government of Mario Monti.

The sale, in which Italy was forced to pay a record 6.5 percent for six month paper, comes on top of early sniping by politicians who were dragooned into accepting Monti a week ago only because of Italy's soaring borrowing costs.

Monti's predecessor, flamboyant media magnate Silvio Berlusconi, was finally forced to resign on November 12 because of untenable yields on Italian debt which have put the euro zone's third largest economy at the epicenter of its widening crisis.

But so far, despite warm praise from European leaders who have greeted Monti with open arms -- in contrast to their barely concealed disdain for Berlusconi -- Italian debt yields are still going the wrong way.

The Italian auction capped a terrible week for the euro zone after a disastrous German bond auction and a continuing failure of European leaders to agree measures to combat the crisis. Moreover, Spain has been forced to pay record interest on its debt despite the landslide election of a conservative government.

Italy's auction on Friday, described by one analyst as "awful," spooked investors further and pushed two-year yields on the secondary market to an eye-watering euro lifetime high of more than 8 percent.

Longer term debt is above a "red line" of 7 percent which forced Portugal, Greece and Ireland into bailouts that Europe could not afford for the much bigger Italian economy.

Many analysts say the euro zone crisis is now systemic, but Berlusconi, whose sexual and legal scandals combined with his inability to pass key reforms led to his demise, quickly pointed out the lack of any substantial premium from Monti's arrival.

"Everyone has been able to see that the (bond) spread has remained high even after I resigned: evidently our government was not at fault at all," he said in a newspaper interview.

"LOUSY GOVERNMENT"

Umberto Bossi, head of the devolutionist Northern League and Berlusconi's principal partner in the ousted center-right government, has refused to support Monti and was scathing about the new government.

"It's lousy. It seems an improvised government to me," he told reporters on Friday. He said Monti was like a "lead climber who has only seen the mountains in a postcard."

Monti's problem is that although most of Italy's parties have promised broad support in parliament to face the crisis, he was unable to persuade them to include ministers in his government, robbing him of political cover.

This problem has already become apparent in his difficulty in appointing about 30 deputy ministers and under-secretaries, apparently because of disagreement among the parties.

His warm welcome in Brussels this week has been interpreted negatively by some politicians and commentators, who accused him of giving details of his reforms to German Chancellor Angela Merkel and French President Nicolas Sarkozy before they were revealed to the parties or markets.

"On his knees in front of Merkel," said a banner headline in il Giornale, owned by Berlusconi's brother Paolo.

A commentary by the paper's editor, Alessandro Sallusti, said Monti "told the Chancellor what he is silent about to his fellow citizens and, what is worse, to his parliament."

Underlining the deep political tensions in Italy, Monti had to meet senior party leaders in secret on Thursday night to discuss the under-secretary problem, apparently because they did not want to be photographed together.

"When you have been spitting on each other for three and a half years, how can you suddenly meet publicly to decide who should be the undersecretaries?" the source said, referring to bitter political infighting since the last election in 2008.

Political sources told Reuters the summit took place, despite official denials, and it was widely reported in Italian newspapers. Appointment of the junior government officials would be delayed until next week, the sources said.

Parties on both left and right will face opposition from their supporters in backing unpopular legislation from Monti to cut Italy's debt and reverse a decade of stagnant growth.

Many political insiders believe the politicians will sabotage Monti as soon as they can, and that he won't make it to the next scheduled election in 2013.

"These are not very encouraging developments. Monti has a honeymoon of about three months in which he can try to push for some major reforms," said Franco Pavoncello, political science professor at Rome's John Cabot university.

"I'd be surprised if there is not a general election by June of next year," he added.

(Additional reporting by Steve Scherer)

Source: http://us.rd.yahoo.com/dailynews/rss/business/*http%3A//news.yahoo.com/s/nm/20111125/wl_nm/us_italy

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