Sicily Default Fears Add to Monti’s Woes

Mario Monti has expressed “serious concerns” that Sicily’s regional government is heading towards default and has asked its governor – who is under investigation for suspected links to the Mafia – to confirm his intention to resign.

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Sicily was among 23 Italian “sub-sovereign entities” downgraded by Moody’srating agency on Monday – following its downgrading of Italy last week – a development that has raised the possibility of a chain of defaults at the local level unless the central government intervenes.

Mr Monti, Italy’s technocratic prime minister, indicated in his statement on Tuesday that Rome would take action to bail out Sicily’s debts, saying it would “deploy the most efficient and appropriate instruments”. He did not elaborate.

Sicily’s debt was 5.3 billion euros at the end of 2011, according to Bloomberg.

The combined debt of Italy’s various tiers of local government accounts for a relatively manageable 5.7 percent of the country’s total of 1.96 trillion euros. but regions and cities are under considerable budgetary pressure as the central government cuts subsidies to balance its own accounts.

“I think Italy’s central government will have to do what the euro zone is doing for Greece or other troubled member countries – ie, get them into a ‘program’, decide if the debt should be restructured and provide financing,” commented Riccardo Barbieri, economist at Mizuho International.

“This would not change the general government debt situation, but it would affect the composition of its funding.”

Regional government spending and debt in Spain has become a key battleground in Madrid’s attempts to meet its budget deficit reduction goals agreed with Brussels.

Sicily has long been identified as one of the most poorly managed of Italy’s regions, with the public sector accounting for the bulk of the island’s economy and jobs. Commentators call it “Italy’s Greece”.

Its precarious financial situation – with a deficit of nearly 4 billion euros last year – has been exacerbated by a political crisis as well as its special status as an autonomous region, which could complicate intervention by Rome.

Raffaele Lombardo, the governor, has said he will resign by July 31, ahead of regional elections in October, regardless of whether his investigation on suspicion of Mafia association comes to trial. He denies the accusations and is due to meet Mr Monti next Tuesday.

Sicily’s previous governor, Salvatore Cuffaro, is serving a seven-year jail sentence for aiding and favoring the Mafia.

Among its downgrades, Moody’s cut the city of Naples to Ba1 junk status, noting its “fragile budgetary position, high debt and exposure to financial risks off balance sheet”.

Moody’s also alluded to “systemic pressure [on Naples] stemming from its weak and demanding socioeconomic environment”, a possible reference to the infiltration of the area’s economy by the organized criminals of the Camorra.

Police on Tuesday arrested Giuseppe Mandara, head of the biggest buffalo mozzarella company in Italy, which is based near Naples, and seized assets worth 100 million euros on suspicion of links to organized crime.