Italian borrowing costs drop as new govt begins

ROME (AP) -- Italy's new unity government faces its first crucial test with a vote of confidence Monday in the lower house — but financial markets already signaled their approval of the apparent resolution to the country's political deadlock.

Italy's stock market was trading up 1.5 percent Monday while the country's borrowing costs on its 10-year bonds dropped below 4 percent for the first time since 2010. That reflected market confidence in the country's new broad-based government, which unites long-feuding parties to draft an agenda to boost the eurozone's third-largest economy out of recession.

The market support comes a day after an unemployed man shot two police officers Sunday outside the prime minister's office at the same time Prime Minister Enrico Letta's new government was being sworn in. The new government grew out of a weekend deal between Italy's center-left and center-right political parties after other attempts to form a new government had failed.

Letta will outline his government program for economic and social reform in an address to Parliament later Monday, followed by a vote of confidence in the lower house. The Senate is to vote on the new government Tuesday.

"It is a moment when everyone must do his duty," Letta told reporters.

Sunday's shooting underlined the urgency of the fresh measures to address Italy's increasingly fragile economy. The gunman has been identified as an out-of-work construction worker.

"He is a desperate man," defense lawyer Mauro Danielli told Sky TG 24 by telephone. "He is someone being tried by the economic situation. He is in a strong state of depression, which provoked him to do this."

Two police officers were wounded in the shooting. One officer who was shot in the neck remained under sedation in serious condition at a Rome hospital, doctors said Monday. The other was shot in the leg and suffered a fracture.

Among the urgent tasks facing Letta's government are economic and social reforms to support low-income households, get young Italians working and help small- and medium-size firms that power the economy. On a political level, the government is expected to reduce the number of lawmakers and rewrite the much-criticized electoral law.

"While the latest news is positive for the markets, the task of the new PM won't be an easy one," Unicredit analyst Loredana Federica said. "A fragmented Parliament and a government coalition backed by rival parties until yesterday leaves some uncertainty on how the urgent economic and institutional reforms Italy needs will be tackled."

For example, the center-right remains staunchly opposed to a tax on first homes introduced by Italy's previous technical government and wants to refund the tax paid by homeowners in 2012.

On Monday, Italy easily raised a total of 6 billion euros ($7.8 billion) in the sale of 10-year and 5-year bonds. Yields on 5-year bonds dropped to 2.84 percent from 3.65 last month, while the yield on 10-year bonds was 3.94 percent, down from 4.66 percent last month.

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Barry reported from Milan.