Italy Considering 30 Billion Euros of Austerity Measures

Italian Prime Minister Mario Monti is asking his country's parliament to pass another round of austerity measures aimed at preventing an Italian default. The latest set of austerity measures being presented to the Italian Parliament is said to be around 30 billion euros ($40 billion). The measures include tax increases as well as an unpopular plan to raise retirement ages. While unions have voiced opposition to the measures and few politicians have enthusiastically back them, they are seen a necessary evil if Italy hopes to avoid a fate similar to that of Greece, Ireland and Portugal. Each of those countries were forced to seek bailouts from the European Union (EU) and the International Monetary Fund (IMF) after yields on their bonds rose to levels that were unsustainable. Italian bond yields surged to nearly 8% last week at an auction of 7.5 billion euros ($10 billion) worth of Italian bonds. The eurozone was nearly in panic mode over the skyrocketing borrowing costs of the Italian government. Although Greece, Ireland and Portugal were able to avoid defaults after seeking bailouts, Italy's debt level is much higher and the eurozone would not be able to bailout Italy as easily as it did the three smaller countries. Although the Italian Parliament is expected to pass the austerity measures, it's unclear how the Italian public will respond to them. Large scale protests and nationwide strikes have become common place in the European Union, as people from Greece to the United Kingdom voice show their disapproval of measures that are being introduced across the European Union in order to reduce fiscal deficits. So far, the market has reacted well to the plans of Italian Prime Minister Mario Monti and the yields on Italian bonds have fallen. However, if the unions announce strikes like the ones that recently brought the United Kingdom and Greece to standstills, those yields could start creeping back up. Critics of the austerity measures say that although they may be effective at reducing government spending, they are bad for the economy because they raise taxes and reduce spending at a time of economic uncertainty. The Greeks, for example, have seen their economy fall further into recession because of the country's austerity measures. Traders should watch carefully not just to see if the austerity measures are passed by the Italian Parliament but also how the Italian public reacts to them over the next few weeks. ACTION ITEMS:

Bullish:
Traders who believe that Italian Prime Minister Mario Monti is leading the country in the right direction might want to consider the following trade:

• The iShares MSCI Italy Index Fund EWI should move higher if market confidence is restored in Italy's ability to pay its debts.

Bearish:
Traders who believe that the austerity measures will do more harm to the Italian economy before they do any good may consider an alternate position:

• Prime Minister Monti's plan will raise taxes on luxury goods, so shorting Luxottica Group LUX may prove profitable regardless of how successful the austerity measures are at bringing Italy's borrowing costs down.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.