Maastricht: Rome appeals for 'maxi-loan': Italy's budget crisis

ITALY yesterday asked for a 'maxi-loan' from the European Community to aid the lira and to bind Italy more tightly to the rest of the Twelve. The desired loan, whose size was not disclosed but is intended to be 'substantial', would support the government's efforts to sort out Italy's disastrous public finances and ailing economy, combat current problems with the lira and assure its speedy return to the European exchange rate mechanism (ERM), a statement said.

The government's intention was disclosed along with its approval of its tough 1993 budget, which is designed to hold spending down to nominal 1992 levels. The budget is associated with a series of painful and unpopular spending cuts and taxes which have provoked demonstrations in many cities.

Giuliano Amato, the Prime Minister, and his cabinet said, however, Italy would draw down the first tranche of the loan only when parliament had approved the 1993 budget, and appealed to MPs to pass it quickly.

The Bank of Italy drained half its reserves to support the lira - in vain - before its 7 per cent devaluation and departure from the ERM last month. And Italy's balance of payments figures for August show a deficit of 4.5 trillion lire (around pounds 2.3bn), more than four times the figure for last August.

But more important than the money, Mr Amato claimed, was the need 'to underline Italy's membership of the Community, as a country which is in financial difficulties, but which we do feel we are overcoming'. Once again Italy is looking to Europe to save it from itself. Mr Amato added that in doing so 'we will subject ourselves to Community standards and monitoring'.

The loan, in other words, will act as an additional straitjacket to force political parties to observe the necessary financial discipline to put Italy's house in order. With strong resistance from the streets and a question mark over the future of the Maastricht treaty - which compelled the government to embark on its deficit-cutting programme in the first place - the government feels it needs reinforcement.

At the same time Italy fears it could slip into the second tier of EC economies in any two-tier Europe: not for any lack of Euro-commitment, but because of its own misgovernment.

Mr Amato hinted as much when he admitted that Italy would 'not necessarily' stick to the straight and narrow 'if we felt left out or not linked (to the EC)'. The loan is also in line with the policy of seeking EC endorsement for its financial and economic strategies.

Piero Barucci, the Treasury Minister, said the request for the loan sent a strong political signal that Italy was determined to return to the ERM as soon as possible. Franco Reviglio, the Budget Minister, added that Italy would be able to lower interest rates as soon as the lira returned to the ERM and that this would help reduce the budget deficit, which has been increased by interest to be paid on the state debts. He added, however, that the timing would depend on how soon parliament approved the budget.