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Italy’s High Debt, Political Dysfunction Fuel Financial Worries Around World

July 13, 2011 at 12:00 AM EDT

GWEN IFILL: We turn now to financial woes on the other side of the Atlantic, as Europe’s debt crisis spreads, now causing panic in Italy.

Ray Suarez has the story.

RAY SUAREZ: Across Europe and on Wall Street this week, markets have had the jitters over Italy’s failing financial health. But today in Rome, Italian Finance Minister Giulio Tremonti sought to calm the fears. He announced plans to strengthen a $57 billion austerity package and speed it through parliament.

GIULIO TREMONTI, Italian finance minister (through translator): The decree to balance the budget will be reinforced for the entire four-year period, and will be approved by Friday.

RAY SUAREZ: Until now, Europe’s debt fears had been focused primarily on Portugal, Ireland, Greece, and Spain, all countries in economic crisis. Italy was not originally at the core of these worries, with its relatively sound banks and lack of speculation in a housing bubble.

Now the Eurozone debt contagion has spread. There’s concern about Italy’s high debt and slow growth and political dysfunction between Prime Minister Silvio Berlusconi and his longtime rival, Finance Minister Tremonti. A bailout seems out of the question. Italy has the world’s eighth largest economy, so a rescue would be far too costly.

As a result, the head of the Italy’s Central Bank and the next head of the European Central Bank, Mario Draghi, welcomed Italy’s plan for swift action.

MARIO DRAGHI, European Central Bank (through translator): The tensions of recent days that have affected Italian government bonds and stock prices have been also caused by the uncertainty about the prospects of public finance. The budget law presented by the government represents an important step for the process of fiscal consolidation.

RAY SUAREZ: Ireland, meanwhile, was dealt a further blow yesterday when its bonds were downgraded to junk status. That raised questions about the possible need for a second bailout there.

European finance ministers have been meeting in Brussels this week, and agreed to further measures supporting Ireland and Portugal. But there have been mixed signals about mounting a new bailout for Greece, where austerity measures have prompted violent street clashes and repeated strikes.

On Monday, German Chancellor Angela Merkel pressed for fast action.

ANGELA MERKEL, German chancellor (through translator): I would like to say that Greece must get a new program very quickly, in very, very short order.

RAY SUAREZ: Today, Merkel said a planned European Council summit on the Greek question set for Friday wouldn’t be necessary. For its part, the International Monetary Fund today urged the Greek government to do more to get its public debt under control.