Bonds Rise
Spanish and Italian 10-year bonds rose for the first time in six days today after the Swiss central bank cut interest rates, stoking speculation European policy makers may also take action to ease stresses in financial markets. The Italian 10- year bond yield fell five basis points to 6.07 percent as of 12:36 a.m. in Rome as the extra yield premium investors demand to hold the security instead of German bunds narrowed 10 basis points to 361 basis points. The spread earlier had reached 391 basis points, a euro-era record.

Italy's benchmark stock index, the FTSE MIB Index, was up 1.2 percent after earlier dropping nearly 2 percent. Intesa Sanpaolo SpA, the country's second-largest bank, and Banco Popolare SC both returned to Milan trading after being suspended amid volatility.

Finance Minister Giulio Tremonti met in Luxembourg today with Prime Minister Jean-Claude Juncker, who heads the group of euro-region finance ministers. “We had a long discussion visiting all the problems the euro area is facing and we'll continue our meditation in common,” Juncker told reporters after the talks, which Tremonti called “long and fruitful.”

Spanish Plans
Berlusconi will make his address after other European governments took steps to show investors they'd remain active during the summer holiday season.

Spanish Prime Minister Jose Luis Rodriguez Zapatero, who announced early elections in November after his country's bond yields also jumped to records, delayed his vacation yesterday to remain in “permanent contact” with the European Commission and Finance Minister Elena Salgado. He later said he'd go on holiday and probably return to Madrid and hold “working meetings” to keep up to date with developments.

President Nicolas Sarkozy called an extraordinary session of parliament for Sept. 6 to vote on France's amended budget plan incorporating changes to the euro rescue fund.

EU Summit
Berlusconi has barely spoken publicly since the selloff of Italy accelerated last month in the run-up to a European Union summit on July 21. That meeting adopted the new aid plan for Greece and established a mechanism to aid countries facing surging borrowing costs such as Italy and Spain before they require bailouts. Opposition parties had publicly called on Berlusconi to address the nation.

Pier Luigi Bersani, leader of the main opposition Democratic Party, said Aug. 1 that Berlusconi's appearance was a “small win” and said the real victory would be “for Berlusconi to go to the Italian president and present his resignation.”

Berlusconi's government managed to speed the passage of the austerity plan through parliament on July 15, a month ahead of schedule, to show investors Italy was serious about bolstering its finances. Unlike Greece, Ireland and Portugal, Italy has kept its deficit under control and the plan seeks to bring the shortfall within the EU's limit of 3 percent of gross domestic product next year and balance the budget in 2014.

Growth Lagging
Italy's government is now pledging to go ahead with plans to boost economic growth, which has lagged behind the euro-region average for more than a decade, complicating efforts to reduce a debt of 120 percent of GDP. That's second only to Greece in the euro region, and at 1.8 trillion euros ($2.6 trillion), is more than the total borrowing of Spain, Greece, Ireland and Portugal combined in nominal terms.

After passing the consolidation package, “it's quite difficult to really think that they can do something on the domestic side that will change dramatically the environment here for Italian debt,” said Laurent Fransolet, head of European Fixed Income Strategy Research at Barclays Capital in London. “I think there is a bigger element of global and European worries coupled with illiquidity and a complete lack of investor confidence in anything.”

Salgado of Spain called on July 29 for the EU summit decisions to be “implemented more quickly” to reassure markets. Finnish Prime Minister Jyrki Katainen told state-owned broadcaster YLE today that Europe is in a “dangerous” situation and all governments must act to curb debt. Spanish and Italian debt yields are “extremely worrying and scary,” he said.

Merkel on Vacation
While Italy, Spain and France are taking steps to calm investors, Germany remains silent. Chancellor Angela Merkel, who is on a three-week vacation, said July 22 before she left that Europe's politicians must follow a “controlled process of sequential, coordinated steps and measures” in combating the roots of the crisis: indebtedness and a lack of competitiveness. Merkel is currently in the Italian Alps.

Investor concern about Berlusconi's ability to steer Italy through the crisis has been heightened by the growing divisions within his ruling coalition that have been spurred by corruption allegations against the premier and some top allies. Dozens of Berlusconi's lawmakers abandoned his coalition last year after criminal charges of sexual misconduct against him, thinning his parliamentary majority.

More recently, Tremonti, considered the enforcer of Italy's fiscal discipline, has faced calls to resign over a criminal probe against a former aide, Marco Milanese, accused of taking kickbacks. Tremonti said July 29 that he had committed errors, but had done nothing illegal.

Ratings Outlook
Standard & Poor's and Moody's Investors Service both cited Italy's political situation as one of the reasons for changing their outlook on the country's credit ratings to negative.

“The challenge here is that the political system is distracted and not fully focused” on the crisis, Michael Spence, a Nobel Prize laureate and professor of economics at New York University's Stern School of Business, said yesterday in an interview with Maryam Nemazee on Bloomberg Television.

“There is a risk that the political and the policy-making system won't function well enough to get on this problem fast enough and there will be a loss of confidence in the ability to get that done,” he said.

Borrowing Costs
The surge in Italy's bond yield is already increasing its borrowing costs. The Treasury priced 10-year bonds to yield 5.77 percent at the last auction on July 28, the highest in more than 11 years. Italy has no sales of benchmark bonds scheduled until Aug. 30. The Treasury has completed 64 percent of the 225 billion euros in bond sales due this year and still needs to auction 81 billion euros more by the end of 2011, UniCredit SpA estimated in a research note.

Lamberto Dini, a former Italian prime minister, blamed U.S. hedge funds that “are using short selling for pure speculation, not precautionary behavior.” He called for short selling to be “suspended for a while.”

“The moment of truth is coming,” Dini said on BBC Radio 4's Today program. “When the house is burning the fire needs to be put out, and that is the job of the government.”

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