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Silvio Berlusconi leaves behind an Italy deep in financial crisis

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What ails Italy Silvio Berlusconi plans to resign as Italy's prime minister, but there's so much more to fixing what ails the country than that.

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Mr. Berlusconi, who won a budget vote today but lost a majority in parliament, said he would quit after approval of the 2012 austerity measures, which could be as early as the end of this month.

Italy's President Giorgio Napolitano said in a statement that Mr. Berlusconi understood what the loss of confidence in parliament meant. When the budget is done, he will "hand in his mandate to the head of state who will proceed with appropriate consultations, paying close attention to the positions and proposals of all political forces," according to the statement reported by Reuters.

What's that mean for the euro zone's third-largest, and most heavily indebted, country? What has to happen needs to happen quickly.

"The immediate issue for Italy is that it has to face the markets to roll over a whopping €31.5-billion in paper this month," said Carl Weinberg, the chief economist at High Frequency Economics. "Even for debt-ridden Italy, this is a heavy load."

But Italy has a long, tough road ahead, regardless of who leads the country through its fiscal crisis.

"The hope will be that Italy can quickly gain a new government with the stomach and the ability to implement major structural reforms," said Ben May of Capital Economics. "But this alone will not solve Italy's woes. The recent run of weak economic data suggest that Italy will soon fall back into recession – we expect the economy to contract by 1.3 per cent or so next year and about 2 per cent in 2013. Against this backdrop, the government will struggle to balance its budget by 2013."

Like Greece, there are questions surrounding whether Italy, too, will be pressured to default on its debts.

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"Even if structural reforms are quickly implemented, it will still probably take a decade or more of wage and cost deflation for Italy to regain competitiveness within the euro-zone, implying that the economy may suffer another decade of near stagnation, he said. "Accordingly, unless the euro zone is willing to provide Italy with years of expensive financial assistance, we think that Italy will eventually come under huge pressure to default, regardless of who is in power."

Italy is fast running out of time as its bond yields spike on a daily basis, closing in on the 7-per-cent mark.

"Seven per cent on Italian 10-years is perilously close and of course while this is no magic number it is psychologically symbolic," said Stewart Hall, senior fixed income and currency strategist at RBC Dominion Securities in Toronto.

"Shortly after hitting this particular benchmark, Ireland and Portugal found themselves requesting a bailout. Given the sheer size of the stock of Italian debt and an aggressive funding calendar over the next two years, the costs of funding this debt is going to exact a toll on the budgetary process and further complicate efforts to contain Italian deficits."

(Tweet of the day, from @jonnygeller: "Berlusconi's retirement party is going to be wild." Most eloquent commentary so far today, from Will Hedden at IG Index: "Gains in London have been tempered by a continuing focus on events in the two bastions of ancient European civilization, Rome and Athens, as they aim to avoid crumbling like the imposing relics that line their respective streets"

Carney warns on Europe Mark Carney expects at least a brief recession in Europe. The question is how long and how deep.

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That, the Bank of Canada governor said today, depends on the region's banks, and how they meet new capital level requirements.

Mr. Carney was speaking in London today to the Canada-U.K. Chamber of Commerce, his first talk since he was named last week to head the Financial Stability Board, the global body that co-ordinates bank rules to prevent another financial meltdown.

"Despite the major steps taken in recent weeks by European authorities, the Bank of Canada now expects the euro area to experience at least a brief recession," he said in the text of his remarks, The Globe and Mail's Jeremy Torobin reports. "The severity of the downturn will depend in part on how European banks delever."

(You've got to hand it to Mr. Carney for sprucing up a speech on global liquidity: "Global liquidity is an amorphous concept. The Usual Suspect for any event or dynamic too complicated to explain, global liquidity is the Keyser Söze of international finance. It has no agreed definition and, as a consequence, there has been no coherent policy approach to tame its more violent tendencies.")

Ottawa delays targets Faced with a deteriorating outlook and high unemployment, Canada's Finance Minister Jim Flaherty today delayed his fiscal targets, scaled back premiums for jobless benefits and extended a work-sharing scheme.

The Conservatives had planned to balance the books by 2014-15, but now won't meet that, and is looking instead at 2015-16 or 2016-17 depending on how much it can find to cut, The Globe and Mail's Bill Curry reports.

Some may take issue with the government, but, really, there's little here to trouble anyone. A change in the economic outlook obviously affects government revenues, and thus its projections. Canada isn't Greece or the United States, and Mr. Flaherty has done the right thing by trying to help push down a jobless rate above 7 per cent. Indeed, I'd argue he needs to do more.

Government, Carney renew inflation target Along with his fiscal update unveiled in Calgary today, Mr. Flaherty also announced that he had renewed with the Bank of Canada its 2-per-cent inflation target.

The agreement will run for another five years, The Globe and Mail's Jeremy Torobin reports.

"The bank will continue its research into potential improvements in the monetary policy framework," the government and the central bank said in a statement. "Before the end of 2016, the government and the Bank of Canada will review the experience over the period and the results of the research and determine the appropriate target for the years ahead."

Dumb on TFSAs Canada's tax-free savings account has been wildly popular since it was introduced three years ago, but a troubling number of people still don't know just what to do with it.

A survey released today by Bank of Montreal shows that 44 per cent of Canadians have opened a TFSA but "few" know what investments they can put in.

Some 37 per cent "have no idea" what investments are eligible, BMO said of the survey done by Leger Marketing. Just over 50 per cent knew that cash is okay, and just one-third knew that mutual funds are eligible. As well, just one-third understood that GICs could be put in.

Perhaps most importantly, Canadians are, on average, putting in just about $3,700 a year, rather than $5,000, leaving "valuable contribution room on the table."

While some of the findings show a better understanding in some areas, BMO said, "we are are still seeing some confusion regarding how to make the most out of a TFSA plan."

TMX profit climbs TMX Group Inc. posted a gain in third-quarter profit today, boosted by derivatives trading and new issuers.

The operator of the Toronto Stock Exchange, which has agreed to a buyout by Canada's major banks and other financial institutions, earned $67-million or 90 cents a share in the quarter, up from $55.2-million or 74 cents a year earlier. Revenue climbed to $167.8-million from $146-million.

Housing starts still high Canada's residential construction industry is still running in high gear.

Housing starts slipped in October to a seasonally adjusted annual pace of 207,600 from September's 208,800, but that's still a strong performance and better than economists expected.

In urban areas, however, construction starts on single homes fell by 9 per cent, while multiples, such as condos, rose 1.7 per cent, Canada Mortgage and Housing Corp. said today.

Clearly, the industry is still being buoyed by emergency levels of interest rates, though economists expect some softening in the market going forward.

"Downshifting economic growth, recent declines in the value of residential building permits, combined with a gradual exhaustion of pent-up demand suggest that starts could soften towards 190,000 to 200,000 into 2012," said Emanuella Enenajor of CIBC World Markets. "However, October's elevated housing construction print suggests that homebuilding activity heading into Q4 still remains strong."

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From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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