Monti warns of Greek-style risk to Italy

ROME (Reuters) - Italy risked a Greek-style economic collapse which could threaten the future of the euro without the austerity package approved by the government, Prime Minister Mario Monti said on Monday, calling on European partners to do their part.

Monti's announcement of the plan on Sunday kicked off one of the most crucial weeks since the launch of the euro more than a decade ago, ending with a summit of European leaders in Brussels on Thursday and Friday to seek a wider set of crisis measures.

"If Italy were not capable of reversing the negative spiral of growth in debt and restoring confidence to international markets, there would be dramatic consequences, which could go as far as putting the survival of the common currency at risk," Monti told parliament.

"Italy is ready to do what it has to do but Europe must not fail to do its part," he said.

The package, dubbed a "Save Italy" decree by Monti, aims to raise more than 10 billion euros ($13.4 billion) from a property tax, impose a new levy on luxury items like yachts, raise value added tax, crack down on tax evasion and increase the pension age.

"Without this package, we think that Italy would have collapsed, that Italy would go into a situation similar to that of Greece," Monti told foreign journalists before heading to parliament to present the package to lawmakers.

He acknowledged the measures would weigh on Italy's fragile economy which most analysts say is already in recession, but said without action the consequences would have been much worse.

Adding to ongoing pressure on Italy to carry out swift reforms, Standard & Poor's warned it could lower its credit rating in an unprecedented mass downgrade of euro zone countries if EU leaders fail to resolve the debt crisis.

"We see a potential increase in risks to Italy's growth prospects and financial stability; although we believe the recently inaugurated Monti government has shown its commitment to implementing growth-enhancing reforms and continuing with fiscal consolidation," S&P said in a statement.

The statement made no specific reference to the austerity package unveiled on Sunday.

The reforms, packed into an emergency decree that takes effect before formal parliamentary approval, are expected to gain the backing of most parties, with the exception of the regional pro-devolution Northern League party.

Italy, the euro zone's third-largest economy, has been at the centre of the debt crisis since mid-year, when its borrowing costs began to approach the levels that forced Ireland, Greece and Portugal to seek an international bailout.

Markets welcomed the measures, which analysts said should be enough to persuade the European Central Bank to continue to hold down borrowing costs by buying Italian bonds on the market.

Yields on 10-year Italian bonds dropped to 6 percent, around a full percentage point lower than last week, while the risk premium over benchmark German Bunds fell below 400 basis points, levels last seen in October.

STRIKES PLANNED

International reaction was also positive, with Dutch Prime Minister Mark Rutte, who met Monti in Rome on Monday morning, the European Commission and the head of the Organisation for Economic Cooperation and Development all welcoming the package.

But in a sign of the opposition which may face Monti's technocrat government as austerity begins to bite, Italy's three main trade unions called strikes on December 12 to protest measures they say are too tough on pensioners and salaried workers.

CGIL, the country's biggest union, said it will hold rallies during a planned four-hour strike, while the more moderate CISL and UIL unions plan a separate two-hour strike on the same day.

Monti, whose sober style contrasts markedly with his flamboyant predecessor Silvio Berlusconi, said Italy wanted to play a full part in Europe and said no country could act alone.

He said his government's austerity measures would contribute to a solution involving the euro zone's bailout fund, the International Monetary Fund and the ECB and he backed French and German calls for tighter controls on national budgets.

"I feel that it would be perfectly understandable that the European Commission should have the same enforcement powers in the area of budgets that it has in the area of competition," he told reporters.

Monti, appointed at the head of a technocrat government last month, had been under growing pressure to come up with concrete measures to address fears about Italy's towering debt mountain.

He has held to Berlusconi's pledge of a balanced budget by 2013, despite growing signs that Italy is heading into a recession that will make it extremely difficult to make inroads into a public debt of 120 percent of gross domestic product.

Deputy Economy Minister Vittorio Grilli said the measures outlined on Sunday would allow the deficit goal to be met despite a forecast that GDP would contract by 0.4-0.5 percent in 2012.

The package is divided into 20 billion euros of budget tightening and an additional 10 billion euros that will be pumped back into the economy in the form of measures to help companies and boost growth.