The Sterling Crisis: Lira limps into last chance saloon: Italy

GIULIANO AMATO, Italy's Prime Minister, yesterday proposed to freeze government spending but failed to fend off a second lira crisis only three days after devaluation.

The Bank of Italy, which had already drained half its reserves trying to prop up the lira before its 7 per cent devaluation on Sunday, had to sell 1.16bn German marks ( pounds 415m) as well as dollars and Ecus (European currency units) but still failed to stop the lira falling below its new floor of 820.68 to the mark on the European markets. At one stage Lamberto Dini, deputy governor of the bank, had to deny a rumour on the financial markets that the lira was to be temporarily withdrawn from the European Monetary System.

The Milan bourse suffered losses of more than 5 per cent, bringing overall losses so far this 'black September' to more than 11 per cent and for the whole year to more than 30 per cent.

Mr Amato, addressing the Chamber of Deputies, said that in order to sort out Italy's economy, the government was prepared 'to do what has never been done before and freeze net spending at nominal 1992 levels'. He urged parliament to accept his proposals for special powers - he had suggested they should last for three years - to intervene with urgent measures if the situation on the international money markets should present a danger to the Italian economy. 'Economic and financial emergencies demand fast action,' said Mr Amato, who argues that lengthy parliamentary procedures make swift action impossible.

A cabinet meeting has been called for this morning to approve further economic measures to give credibility to the government's reform plans. These have not yet been disclosed. 'We must adopt measures to give confidence to savers . . . and calm market tension. Otherwise we risk consequences we do not deserve and which we can avoid,' he said.

But Massimo D'Alema, the ex- Communists' floor leader, retorted: 'He is like the captain of a ship who, as it is about to sink, decides to summon the crew for a lesson on navigational theory.'

The senate, meanwhile, approved a bill which is an important element in the government's plans to slash state spending. It gives it wide powers to make substantial cuts in the most wasteful areas of public life - pensions, health, the civil service and local government. It also includes a new form of levy, a controversial tax on houses and flats which will help fill the coffers of local authorities.

The bill, which the government claims will save some 30 trillion lire (about pounds 15bn) now goes to the Chamber of Deputies.

The International Monetary Fund also weighed in yesterday with a call for Italy to cut state spending. Michael Mussa, the fund's chief economist, said in Washington: 'Immediate measures are absolutely necessary, they cannot wait three or six months. To restore market confidence the (1993) budget must include details of the government's three-year plan (to reform the economy) and parliament must approve it immediately.'