Markets nervous as Monti presses Italy reforms

FRANKFURT (MarketWatch) � Italy�s bond yields temporarily rose Friday, reflecting investor fears that Prime Minister Mario Monti�s push to overhaul the nation�s labor laws could run into political roadblocks amid heavy union opposition.

Monti�s cabinet on Friday approved a framework for changes to labor laws, clearing them for presentation to Parliament in coming weeks, Agence France-Presse reported. The prime minister has made labor reform a cornerstone of his effort to prevent Italy, Europe�s third-largest economy and the world�s third-largest government bond market, from becoming consumed by the euro-zone debt crisis.

Reuters

Mario Monti during his time at the European Commission a decade ago.

The powerful union CGIL has threatened to call a general strike in response to the measures. The union�s opposition has stoked worries the center-left Democratic Party, a close CGIL ally, could oppose the plan, noted Tobias Blattner, euro-area economist at Daiwa Capital Markets.

�A failure to overhaul Italy�s rigid labor market would once again question the country�s ability to return to a sustainable growth path, which is required to reduce its large debt burden of 120% of [gross domestic product],� Blattner said in a note. �And following months of national unity, a failure by Monti to win the support of Parliament would almost certainly lead to a collapse of the interim government, making it hard to imagine that a newly elected government ! would be able to deliver such much-needed reforms.�

Italian bond yields rose sharply earlier in the day but pulled back in late-afternoon action. The 10-year Italian yield IT:10YR_ITA �remains 5 basis points higher at 5.07%, according to FactSet Research data.

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Europe's week ahead

Can Germany's DAX stay above 7,000 and will the FTSE 100 breach 5,900? Italian bank UniCredit announces its full year earnings and the latest German Ifo Business Climate Index figures are released. Photo: Reuters

Italy�s FTSE-MIB stock index XX:FTSEMIB �rose 0.2% Friday to 16,485.20, but ended the week down 3.5%.

�A sentiment-supportive outcome [would likely] see the Monti administration press forward with its proposals despite fierce opposition from labor unions. Alternatively, a watered-down package may rekindle risk aversion ... amid renewed fears about Italy�s fiscal outlook,� said Ilya Spivak, currency strategist at FXCM in London.

Monti�s proposals would allow companies to lay off workers for economic reasons without legal recourse. In exchange, workers would be entitled to compensation of up to 27 months� salary, Barclays Capital said.

Under current law, workers who are laid off by employers for any reason can appeal to an employment court, which has the power to force companies to rehire the employees if the layoff is found to be without just cause.

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