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Bank of Italy warns on weak growth

Bank of Italy warns on weak growth
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Italy’s central bank says the country’s growth is feeble and is likely to remain that way.

Bank deputy director-general Ignazio Visco warned a weak economy is threatening the Rome government’s efforts to contain its massive debts.

“We risk a phase of stagnation, which would slow the decrease in the debt burden,” Visco told a Senate committee, He said Italy’s growth is ilkely to be under one percent this year and even weaker in 2012.

Visco spoke one day after Prime Minister Silvio Berlusconi backtracked on parts of a 45.5 billion euro austerity package intended to balance the budget by 2013.

To avoid splits within his coalition, Berlusconi scrapped a tax on high earners and is scaling back cuts to local authority funding.

A government statement contained little detail on how the government would make up for revenue lost due to the changes.

The package was passed in parliament this month to try to stem weeks of market turbulence that threatened to suck Italy into a Greek-style financial crisis.

It was agreed after heavy pressure from the European Central Bank, but has been criticised by groups ranging from employers’ federation Confindustria to the main trade unions, the opposition and even significant sections of the ruling coalition itself and is certain to be amended further in the coming weeks.

Central bank deputy director-general Visco said changes to the austerity package must include measures to boost growth in the euro zone’s third largest economy: “Balancing the budget has to be combined with economic policy aimed at reviving prospects for growth in our economy.”

At the same time the European Central Bank returned to the market to buy government Italian bonds.

The action was necessary because of weak demand at an auction of 7.7 billion euros worth of long term Italian bonds.

Traders said the ECB stepped in after the auction to buy significant amounts of 10-year Italian debt, halting the rise in yields, that is the level of interest that Rome has to offer on its bonds.

The auction will do little to alleviate the market’s central fear that Italy, seen as too big to be bailed out, will not be able to issue bonds at an affordable level to finance its huge 1.9 trillion euro debt burden.

Italy must still sell up to 90 billion euros in bonds this year and ECB purchases have been steadily decreasing.