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Bank of Italy warns new austerity plan monitored
Bank of Italy warns the government's new austerity measures must not
By The Associated Press

ROME (AP) ' The Bank of Italy warned Tuesday that the government's revamped austerity plan must not cut back on its original euro45.5 billion ($65.9 billion) proposal to raise taxes and cut spending ' and said even with the plan Italy risked economic stagnation.

Premier Silvio Berlusconi and his allies late Monday issued a revision of the proposed austerity measures after widespread public anger, deciding to scrap special tax on high earners and spare small town governments. The new measures tinker with retirement age and call for a reduction in the number of lawmakers.

The Bank of Italy's deputy chief Ignazio Visco told parliament committees Tuesday that he hoped the market's response to the revision "isn't too penalizing." He said the overall austerity measures "cannot be reduced" and will be monitored to ensure they're being followed.

He warned that regardless of the measures, Italy still risked "a phase" of economic stagnation. Growth might be less than one percent this year and even less in 2012, making aims for a balanced budget more difficult, he warned.

"In the current context, in which the costs of a possible deviation from the goals are very high, the total planned adjustments cannot be reduced," he said.

Berlusconi's allies have insisted the revised plan would help achieve a balanced budget by 2013 as demanded by the European Central Bank.The government is pressing for approval before the end of September to calm markets. By Tuesday morning, there were already more than 1,000 amendments to the proposal.

The original emergency austerity measures were announced on Aug. 12 on the eve of Italy's big summer holiday. They called for those earning above euro90,000 ($130,000) to pay an extra 5 percent income tax over the next three years, while those over euro150,000 ($215,000) would pay 10 percent.

Unions and business lobbies charged they penalized honest taxpayers given widespread tax evasion by the self-employed. Monday's huddle scrapped that, though it kept a solidarity tax for lawmakers.

Also Tuesday, Italian borrowing rates dropped in a pair of bond sales that easily raised euro6.739 billion ($9.76 billion), thanks largely to the ECB's program to buy government debt.

Investors demanded interest rates of 5.22 percent to lend the Italian government some euro4.759 billion in 10-year bonds, down from 5.77 percent in a similar auction last month. The Treasury's debt sale on Tuesday was oversubscribed 1.27 times.

Borrowing rates for three-year bonds dropped to 3.87 percent, from 4.8 percent last month.

Italy's borrowing rates ' both on the primary and secondary market ' have eased since the ECB on Aug. 8 began buying bonds of some eurozone countries to stem the worsening debt crisis.

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