ANALYSIS
MILAN — Italy must step up efforts to curb its colossal debt and revive growth to reverse negative investor sentiment that threatens to push it to the brink, despite a reform drive and a banking system sounder than Spain's.
But economists and the central bank say Rome can still tap a large domestic savings pool to help ght the mounting cost of servicing its 1.9 trillion euro ($2.4 trillion) debt.
After initial investor euphoria at the appointment of technocrat Prime Minister Mario Monti last year, Italian bond yields have been rising since March, topping 6 per cent and making bank loans to families and companies in a credit-starved economy hugely expensive.
Even though Italy's de cit and unemployment are lower than Spain's and its banks are not exposed to a real estate crisis, doubts about Rome's ability to turn itself around during a deep recession are keeping international investors at bay.
On Monday, Austria's Finance Minister Maria Fekter said Italy may have to seek aid from European partners in the coming months, as Spain just did for its banks, drawing an angry rebuke from Monti.
"On substance, Italy is a totally different case than Spain and it is now even more important that Italy works further on its own reform steps," said Daniel Gros, Director at the Centre for European Political Studies.
"Italy has the resolve to do it. But reforms take time and market sentiment can turn in 10 seconds."
Investors have welcomed Monti's austerity drive and a radical pension reform. But support has been waning after Rome failed to balance tax hikes with bold pro-growth reforms.
If the economy does not start to grow after a decade of stagnation, it will face mounting dif culty in bringing down its debt, now at 120 per cent of gross domestic product - second only to Greece's debt mountain in the euro zone.
"The markets say: what is Italy doing to tackle the fundamental problems that have stopped it growing? Because if those problems remain, Italy will always stay in political and economic dif culty," former European Central Bank executive board member Lorenzo Bini Smaghi told Reuters.
Bank of Italy Governor Ignazio Visco said last week Italy's emergency is not over and pressed Monti to speed up reforms.
Yet the unelected premier, appointed after the collapse of billionaire Silvio Berlusconi's scandal-plagued government last November, appears on the defensive. He reacted bitterly last week to criticism by two leading Italian economists in top daily Corriere della Sera.
Contrary to events in Spain and other European countries, Italian banks — including top lenders Unicredit and Intesa Sanpaolo — have managed to bolster their capital base by tapping private investors and not the state. But questions remain about the ability of No.3 bank Monte dei Paschi di Siena to plug a 3 billion euro capital shortfall.
There is no real estate bubble, but the banks face a risk from bad loans, which have nearly doubled in the crisis to 11.2 per cent of total lending.
Ed Parker, director of sovereign ratings at credit ratings agency Fitch, said the Spanish bailout had no direct implications for Italy or other countries.
"The Italian banking sector