Greece's debt crisis on Thursday dominated the first day of Italian Prime Minister Mario Monti's visit to the United States, as he urged the International Monetary Fund to be more lenient with Athens in bailout talks to prevent a big potential explosion.
Monti welcomed the IMF's insistence that Europe erect a strong firewall to prevent debt contagion from spreading, but he also said the fund should not be too rigid in how it applies its lending requirements.
If there is a minimum of compliance with the requirements set out, this is the moment to turn the page and extinguish this potential big explosion, Monti told an economics think-tank before meeting with President Barack Obama at the White House.
Later in a news conference at the Italian Embassy, Monti said he had discussed Greece with Obama and that it was in everyone's interest to ensure a non-explosive solution of the Greek case.
He also discussed the euro zone debt crisis with U.S. congressional leaders. On Friday, the Italian prime minister heads to New York where he will try to persuade Wall Street investors of his efforts to bring the budget of the euro zone's third-largest economy under control.
Where I see room for improvement on the part of the IMF is in having a broader understanding of specific situations where strict adherence to a model might prevent the pragmatic solution of the problem, he told the audience at Peterson Institute.
Monti said his 12-week-old government had already seen positive results from a 30 billion euro ($39.91 billion) austerity package, which was introduced last year in the midst of a political and budgetary crisis.
He said a sharp drop in Italian bond yields since then was a signal of greater market confidence.
Obama said he had told Monti that the United States would do whatever it could to help stabilize the situation in Europe, and reiterated that a strong defense was needed to contain the crisis.
Euro zone leaders are expected to finalize a 500 billion euro bailout fund at the beginning of March to help countries hurt by the crisis. Some, including the United States and the IMF, have called on Europe to boost that amount.
The so-called troika of the IMF, European Union and European Central Bank are finalizing details of a second international bailout for Greece in an effort to help it avoid a default.
Greek politicians on Thursday agreed to reform measures that would narrow the country's budget deficit, a critical pre-condition by the troika for receiving more aid.
Monti said that if the Greek situation is resolved, it would further push down Italian bond yields. The 10-year bond spread between Italian bonds and German Bunds, seen as a measure of the perceived risks of Italy, peaked at 574 basis points in mid-November before the former government led by Silvio Berlusconi resigned.
Monti said a key element of political uncertainty in Italy was removed last week when Berlusconi expressed continued support for the current technocrat government. Berlusconi's support provides Monti's government with needed parliamentary backing.
Monti said if investors perceived that Greece is moving outside the problem area and Italy continues to implement budget and structural reforms, there is remarkable room out there for capital gains on these Italian bonds.
With 1.9 trillion euros in outstanding debt, Italy's debt burden is greater than Greece, Portugal and Spain combined.
He said Italy did not need financial support, and repeated the pledge of EU leaders that after Greece, private bondholders would not be forced to take steep losses on government bonds as part of a debt restructuring.
Monti's government has presented measures to parliament to liberalize the Italian economy and discussions are underway to reform the labor market by the end of March.
The Bank of Italy said on Thursday that the nation's economy would shrink by around 1.2 percent this year if the recent fall in borrowing costs is maintained. If bond yields rose again, the decline in output would be around 1.5 percent, it said.
Sergio Marchionne, chief executive of Italian automaker Fiat
Monti will give financial markets serenity, he told reporters. To see an impact on investments we will have to wait longer.
($1 = 0.7517 euro)
(Additional reporting by Lesley Wroughton and Stella Dawson; editing by Chizu Nomiyama, Tim Ahmann, Andrew Hay, Gary Crosse)