Borrowing costs for Italy's indebted government fell to their lowest level in years last week, a move the country's Finance Mininster Vittorio Grilli says is justified even though the economy is entrenched in a recession and the risk of political instability following elections next month looms.
"I don't think anything is wrong, we work hard at it frankly, when (Prime Minister Mario) Monti's government came in more than a year ago, we had a tough job ahead of us, we had to stabilize the economy, stabilize the markets," Grilli told CNBC in an interview on Monday.
He was referring to a fall in Italian government bond yields which hit multi-year lows on Friday following a strong debt auction, with three-year borrowing costs dropping below 2 percent for the first time since March 2010.
"We had to go through a very tough budget to achieve a major objective that we had – which is a balanced budget by 2013. Clearly that didn't help as far as the macro economy, but that's the price we knew we had to pay. The market is also focused on that – they wanted to see our public finances in order," Grilli added.
Outgoing Prime Minister Mario Monti has led reforms to rebalance Italy's economy and lower a huge public debt burden through measures such as spending cuts, tax rises and pension reforms. Monti announced his intention to step down last month and has also revealed plans to seek a second term as prime minister, leading a coalition of centrist parties who support his reform-minded agenda.
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A brighter outlook for the global economy and renewed confidence that a debt crisis in the euro zone has been contained has pushed government bond yields in the region lower. A Spanish government bond sale last week was also well received, sending the country's benchmark 10-year bond yields to their lowest level in 10 months.
Analysts say Monti's austerity push has contributed to the sharp slowdown and high levels of unemployment in the euro zone's third largest economy, which entered a recession in 2011. Italy's economy is expected to have contracted 2.4 percent in 2012, according to official government growth domestic product (GDP) forecasts.