Italy cheers Germany's promotion

ROME - Italy on Wednesday cheered German Chancellor Angela Merkel's appreciation of its budget efforts, but the path out of the crisis appears to be still uphill.

During a bilateral meeting in Berlin, Merkel called herself "confident" in Prime Minister Mario Monti's cabinet of technocrats.

Italy has an "ambitious" agenda that will contribute to the stabilization of the European Union (EU) single currency, she said.

On the same day, the Mediterranean country sold a targeted 9 billion euros ($11 billion) of six-month government bills at the lowest rate since March, after two-year borrowing costs fell nearly two percentage points at another auction on Tuesday.

Since late July, the spreads against the German bond - considered a barometer of investor faith in Italy's ability to weather the eurozone crisis - has reduced by 130 basis points following a pledge by the European Central Bank (ECB) to resume its bond-buying program if necessary.

If demand for sales of 6.5 billion euros ($8.1 billion) of five and 10-year bonds scheduled for Thursday is high without yields rising, that would be another positive indicator, but only in the short term, local analysts warned.

Investor sentiment is expected to remain weak in a country whose debt-to-GDP ratio is at over 120 percent, and families are feeling more pessimistic about their finances now than they have in the past 15 years.

"Italy's public debt has reached a record level of 1,973 billion euros (2,471 billion dollars). This is definitely too much for a stagnant economy," Maurizio Mazziero, a financial analyst at Mazziero Research, told Xinhua.

"Our industrial system is overwhelmed by a voracious fiscal burden, and the recent austerity measures have further fell on families. These are structural problems Italy will have to deal with for long time, and investors know it," he said.

The unstable political situation does not help. "The scenario resulting from elections scheduled for spring 2013 appears to be very uncertain.

Markets fear that what Monti's government has done could be disavowed by the next leaders," said Angelo Drusiani, a fund manager at Albertini Syz & Co.

The month of August, a feared one in terms of financial markets' volatility, is coming to a close on a positive note, but analysts remained cautious.

"Two important changeovers are expected next month. Firstly, German Constitutional Court will rule on the EU anti-spread shield's compatibility with German law on September 12," Drusiani told Xinhua.

Secondly, he added, investors are also carefully watching what the US Federal Reserve has in mind to support economic growth and improve the financial situation after the fast-approaching presidential election.

Most local experts believe the Italian economy, thanks to its low private debt and large gold reserves, is potentially solid enough for overcoming the debt crisis without external help. The spreads, however, have remained more than 200 points higher than the country's fundamentals would suggest.

"For this reason Italy is pushing the EU into adopting the spread shield that would allow rescue funds to be used to support the bonds of countries facing soaring borrowing costs," Drusiani said.

According to the formula embraced by the June 28-29 summit, which was left vague, the ECB will act as fiscal agent for the rescue funds.

But among the hairiest issues is the definition of the contents of the memorandum of understanding, or the commitment document that must be signed to activate the financial stabilizing mechanisms.

Some fear additional, burdensome conditions. And indications on what actions the ECB has in mind will have to wait, as chief Mario Draghi will not attend the annual symposium conference in Jackson Hole, US state of Wyoming, at the end of this week due to a "heavy workload" in Europe.