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Falling Italian Bonds Yields Justified: Finance Minister

Ian Cumming | Axiom Photographic Agency | Getty Images

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.

(Read More: The Battle Lines Are Drawn in Italy's Election)

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.

Recession Lingers

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.

Grilli, however, believes the reform efforts will pay off in the second half of this year, when he expects the economy to start growing again, after bottoming in the first quarter.

"In the second half, it (the economy) should start growing again – that's important for reducing unemployment – we have introduced major reforms in the labor market to address youth unemployment that is absolutely unacceptable," he said.

The jobless rate for 15-24 year-olds in Italy hit an all-time high of 37.1 percent in November.

Election Outcome

Despite the negative effects of austerity, Grilli said it is vital that reform efforts continue following the elections that are scheduled for February 24-25.

(Read More: Monti Sees Return of Investor Faith in Italy)

"If you want Italy to be successful in the future – whoever is going to be leader after February will have to pursue what we've been doing. Italy needs to continue the reform process to find new productivity and competitiveness," he said.

According to the latest polls, the center left Democratic Party, led by Pier Luigi Bersani, is on course to get most seats in the Italian parliament, with 37.8 percent support, Reuters reported. But, Silvio Berlusconi's center-right coalition is gaining ground, with 26 percent. Meanwhile, support for Monti's centrist grouping stood at 14.5 percent.

Current front-runner Bersani told CNBC during an interview in December that he supports the austerity measures that have been pushed through, saying they are necessary. However, Bersani also favors growth measures to kick-start the economy.

(Read More: Bersani to Italy, Markets: I Get It on Reform)

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