ITALIAN ECONOMIC PRIORITIES IN RUN-UP TO LONDON

UNCLAS ROME 000320

DEPT FOR EUR/WE
TREASURY FOR OIA VIMAL ATUKORALA AND CLAY BERRY
DEPT PLEASE PASS TO USTR
SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD IT
SUBJECT: ITALIAN ECONOMIC PRIORITIES IN RUN-UP TO LONDON


1. (SBU) Summary - The Italian economy remains troubled, especially
as exports have turned down dramatically. A top Central Bank
official expects government instruments to bolster Italian banks'
capital to be fully subscribed. The government is shifting its
focus to addressing the prospect of higher unemployment and watching
out for inflation. Italy looks to the US for leadership at the next
G20 meeting, especially on boosting trade and strengthening the
IFIs. The official says the press has exaggerated the European
East-West economic policy divide. Italy is watching eastern and
central European economies closely, given Italian bank exposure, but
does not consider that the entire region is in dire straits. End
Summary.


2. (U) The Charge on March 16 met with the number two official at
the Central Bank of Italy, who outlined Italy's economic situation
and the government's approach to the ongoing global financial crisis
and recession. Director General Fabrizio Saccomanni described an
Italian economy that remains troubled, especially as export markets
have deteriorated quickly. Italy's export strength has
traditionally lain in a diversity of niche markets, especially in
manufacturing. All such markets have, improbably, turned down at
once. As a result, firms are seeking new loans to finance unsold
inventory, causing Italian banks to balk somewhat.


3. (U) Saccomanni predicted that the recently unveiled Tremonti
instruments for bolstering bank capital will be fully subscribed
(10-12 billion euros) and that the press has made too much of banks'
alleged reluctance to agree to the government's conditions on
executive pay caps and loan monitoring. The Bank's and the
government's main economic concern now is the prospect of
dramatically higher unemployment among temporary workers - primarily
but not exclusively young people shut out of permanent employment by
expensive government-mandated employee benefits. The Bank is also
alert to inflationary signs, given the dramatic injections of
liquidity and increased government spending around the world.


4. (SBU) Regarding the global financial crisis, Saccomanni argued
that the large economies should allow time for the measures they
have taken to date to work. He believes markets and business
confidence will be bolstered if the London G20 summit produces
agreement on three areas: increased export financing, resumption of
trade talks, and strengthening the IFIs' resources and mandates. In
this, Italy is looking for US leadership. Saccomanni lamented that
the advanced economies recently sent mixed signals by pledging to
reject protectionism, but then shelving the Doha round trade agenda.



5. (SBU) Saccomanni charged that press misrepresented the events of
last month's meeting of western and eastern European economic
policymakers in Berlin. The meeting was intended to achieve policy
coordination, but several central end eastern officials unexpectedly
unveiled a 200 billion euro bailout proposal. While the conferees
agreed to a multi-tool coordination and assistance plan
(IMF-monitored balance of payments assistance, trade credits,
development programs),the press chose to focus on the 'failed'
bailout proposal.


6. (U) Saccomanni said old Europe leaders see in central and
eastern Europe a mixed bag of economic circumstances - not all
countries are in same situation. The Bank of Italy is paying
especially close attention to countries where Italian banks have
ramped up lending in recent years. Some such countries - Slovenia
and Slovakia, for example - are doing very well, according to
Sacommanni.

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