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INCORPORATION OF DOCUMENTS BY REFERENCE

This document is The Republic of Italy’s Annual Report on Form 18-K (“Annual Report”) under the U.S. Securities Exchange Act of 1934 for the fiscal year ended December 31, 2006. All amendments to the Annual Report filed by The Republic of Italy on Form 18-K following the date hereof shall be incorporated by reference into this document. Any statement contained herein, or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this document to the extent that a statement contained herein or in any other subsequently filed document that also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this document.

TABLE OF CONTENTS


Summary Information			6
Republic of Italy			9
Area and Population			9
Government and Political Parties			10
The European Union			12
Membership of International Organizations			15
The Italian Economy			16
General			16
2007 Developments			18
Gross Domestic Product			19
Principal Sectors of the Economy			23
Employment and Labor			34
Prices and Wages			37
Monetary System			39
Monetary Policy			39
Exchange Rate Policy			43
Banking Regulation			43
Credit Allocation			50
Exchange Controls			51
The External Sector of the Economy			52
Foreign Trade			52
Geographic Distribution of Trade			54
Balance of Payments			57
Reserves and Exchange Rates			62
Public Finance			64
The Budget Process			64
European Economic and Monetary Union			64
Accounting Methodology			66
Measures of Fiscal Balance			67
The Council Recommendation to Italy Relating to its Excessive Government Deficit			69
The 2007 Stability and Growth Program			70

Defined terms and conventions

We use terms in this Annual Report that may not be familiar to you. These terms are commonly used to refer to economic concepts that are discussed in this Annual Report. Set forth below are some of the terms used in this Annual Report.

	•		*Gross domestic product or GDP* means the total value of products and services produced inside a country during the relevant period.

	•		*Gross national product or GNP* means GDP plus income earned by a country’s nationals from products produced, services rendered and capital invested outside the home country, less income earned inside the home country by non-nationals.

	•		*Imports and Exports*. Imports are goods brought into a country from a foreign country for trade or sale. Exports are goods taken out of a country for trade or sale abroad. Data on imports and exports included in this Annual Report are derived from customs documents for non-European Union countries and data supplied by other member states of the European Union.

	•		*The unemployment rate* is calculated as the ratio of the members of the labor force who register with local employment agencies as being unemployed to the total labor force. “Labor force” means people employed and people over the age of 15 looking for a job. The reference population used to calculate the Italian labor force in this Annual Report consists of all household members present and resident in Italy and registered with local authorities.

	•		*The inflation rate* is measured by the year-on-year percentage change in the general retail price index, unless otherwise specified. The harmonized consumer price index is calculated on the basis of a weighted basket of goods and services taking into account all families resident in a given territory. Year-on-year rates are calculated by comparing the average of the twelve monthly indices for the later period against the average of the twelve monthly indices for the prior period.

	•		*Net borrowing*, or budget deficit, is consolidated revenues minus consolidated expenditures of the general government. This is the principal measure of fiscal balance for countries participating in the European Economic and Monetary Union and is calculated in accordance with European Union accounting requirements.

	•		*Primary balance*, is net borrowing less interest payments and other borrowing costs of the general government. The primary balance is used to measure the effect of discretionary actions taken to control expenditures and increase revenues.

Unless otherwise indicated, we have expressed:

	•		all annual rates of growth as average annual compounded rates;

	•		all rates of growth or percentage changes in financial data in constant prices adjusted for inflation; and

•

all financial data in current prices.

Information Sources

The source for most of the financial and demographic statistics for Italy included in this Annual Report is data prepared by Istituto Nazionale di Statistica, or ISTAT, an Italian government entity established to provide comprehensive information used for European comparisons, elaborations on such data and other data published in the Annual Report of the Bank of Italy (Banca d’Italia) dated May 31, 2007. We also include in this Annual Report information published by the Organization for Economic Co-operation and Development, or OECD, and the Statistical Office of the European Communities, or Eurostat, particularly in connection with comparative data.

Certain other financial and statistical information contained in this Annual Report has been derived from official Italian government sources, including the 2008-2011 Program Document (Documento di Programmazione Economica e Finanziaria) and the November 2007 Update to the Stability and Growth Program (Programma di Stabilitá dell’Italia — Aggiornamento Novembre 2007). In this Annual Report we have substituted statistical data published by ISTAT for equivalent information derived from Bank of Italy sources that was published in earlier filings we have prepared.

Revised National Accounts

In 1999, ISTAT introduced a new system of national accounts in accordance with the new European System of Accounts (ESA95) as set forth in European Union Regulation 2223/1996. These were intended to contribute to the harmonization of the accounting framework, concepts and definitions within the European Union. Under ESA95, all European Union countries apply a uniform methodology and present their results on a common calendar. Both state sector accounting and public sector accounting transactions are recorded on an accrual basis.

In December 2005, ISTAT published general revisions to the national system of accounts reflecting amendments to ESA95 set forth in the European Union Regulations 351/2002 and 2103/2005. These revisions include: (i) a new methodology to evaluate the amortization of movable and fixed assets, (ii) a new accounting treatment for financial intermediary services, (iii) revisions to the methodology for calculating general Government and investment expenditure, and (iv) the introduction of a new accounting system for a portion of social security contribution on an accrual basis.

In connection with revisions to the national accounting system implemented in December 2005, ISTAT replaced its methodology for calculating real growth, which had been based on a fixed base index, with a methodology linking real growth between consecutive time periods, or a chain-linked index. One of the effects of using chain indices is that other than for the first year in the chain (2001 in most tables included in this document) component measures will no longer aggregate to totals. Also, as a result of this change in methodology, all “real” revenue and expenditure figures included in this document from and including 2001 differ from and are not comparable to data published in earlier documents filed by Italy with the SEC. The general

SUMMARY INFORMATION

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this document.

Gross Domestic Product: According to International Monetary Fund data published in October 2007, the economy of Italy, as measured by 2006 GDP, is the seventh largest in the world. In 2006, Italy’s annual real GDP growth in Italy was 1.8 per cent, compared to 0.6 per cent in 2005 and 1.5 per cent in 2004. Italy’s GDP growth rate has been lower than the average GDP growth rate of the euro area each year in the past decade. The growth gap between other euro area countries and Italy in the past decade reflects the persistence of several medium and long-term factors, including the difficulties in fully integrating southern Italian regions into the more dynamic economy of northern and central Italy, unfavorable export specialization in traditional goods, inadequate infrastructures, the incomplete liberalization process and insufficient flexibility of national markets.

The European Economic and Monetary Union: Italy is a signatory of the Treaty of European Union of 1992, also known as the “Maastricht Treaty,” which established the European Economic and Monetary Union, or EMU, culminating in the introduction of a single currency. Eleven member countries, including Italy, met the budget deficit, inflation, exchange rate and interest rate requirements of the Maastricht Treaty and were included in the first group of countries to join the EMU on January 1, 1999. On that date conversion from their old national currencies into the euro was irrevocably fixed and the euro became legal tender. On January 4, 1999 the noon buying rate for the euro, as reported by the European Central Bank (the “Noon Buying Rate”) was €1 for US$1.1812. Since that date initially, the euro depreciated against the dollar, reaching a low of €1 for $0.8270 on October 25, 2000 and thereafter progressively appreciated against the dollar. On April 7, 2008, the ECB exchange rate was €1 for $1.5693. The euro was introduced in physical form in the countries participating in the EMU on January 1, 2002 and replaced national notes and coins entirely on February 28, 2002.

Foreign Trade: Over half of Italy’s exports and imports involve other European Union countries. Italy’s main exports are manufactured goods, including industrial machinery, office machinery, automobiles, clothing, shoes and textiles. Since 2000, Italy has recorded current account deficits each year. This was principally due to increased competition from developing countries in South-East Asia, the depreciation of currencies in Asia, unfavorable exchange rates in the period 2003-2006 and the rise in price of oil and gas.

Inflation: As measured by the European Union harmonized consumer price index, in 2007 the inflation rate in the euro area and Italy grew by 2.1 per cent and 2.0 per cent, respectively, compared to 2.2 per cent in 2006 and 2005 in both the euro area and Italy.

Public Finance: Italy historically has experienced substantial budget deficits and high public debt. Countries participating in the EMU are required to reduce “excessive deficits,” adopting budgetary balance as a medium-term objective, and to reduce public debt. Italy,

however, recorded budget deficits as a percentage of GDP higher than the 3.0 per cent reference rate imposed by the Maastricht Treaty in 2001 and each year during 2003-2006. For 2007, Italy’s budget deficit is estimated at 1.9 per cent of GDP. Italy’s public debt as a percentage of GDP declined from 105.6 per cent in 2002 to 103.8 per cent in 2004, due primarily to the repayment of debt with proceeds from Italy’s privatization and real-estate disposal programs, and grew back to 106.5 per cent in 2006.

Privatization Activities: Since 1994, the Treasury has carried out a number of privatizations in the financial institutions sector, the telecommunications sector and the energy sector. From 1994 to December 31, 2007, the Treasury’s privatization program generated proceeds of approximately €153 billion, making the Italian privatization program one of the largest and most successful privatization programs in Europe. Proceeds from privatizations in the four years to December 31, 2007 were very low by comparison to previous years. Italy slowed down the pace of its privatizations due to the volatility of financial markets and the slowdown of the global and U.S. economies.

The Italian Political System: Italy is a democratic republic. Italy is a civil law jurisdiction, with judicial power vested in ordinary courts, administrative courts and courts of accounts. The Government operates under a Constitution that provides for a division of powers among Parliament, the executive branch and the judiciary. Parliament comprises a Senate and a Chamber of Deputies. The executive branch consists of a Council of Ministers selected and headed by a Prime Minister. The Prime Minister is appointed by the President of the Republic and his government is confirmed by Parliament. Following the general Parliamentary elections held on April 9 and 10, 2006, the Unione, the center-left coalition led by Mr. Romano Prodi, obtained a majority in both the Chamber of Deputies and in the Senate. As a result, President Giorgio Napolitano appointed Mr. Prodi as Prime Minister. On January 24, 2008, Mr. Romano Prodi resigned as Prime Minister after being defeated in a vote of confidence in the upper house of the Parliament, the Senate. Following such event, Italy’s President, Mr. Giorgio Napolitano, dissolved the Parliament on February 6, 2008 and called for legislative elections to be held on April 13 and 14, 2008.

2007 Developments: Italy’s real GDP grew by 1.5 per cent in 2007, compared to 1.8 per cent in 2006, based on ISTAT data. Italy’s seasonally adjusted average unemployment rate decreased to 6.8 per cent in 2007, from 7.7 per cent recorded during the previous year. Consumer prices, as measured by the harmonized EU consumer price index, increased at an annual rate of 2.0 per cent during the twelve months ended December 31, 2007, compared to an increase of 2.2 per cent during the twelve months ended December 31, 2006.

On February 29, 2008, ISTAT published updated public finance ratio estimates for 2007, which are set forth below and shown as percentages of GDP in the relevant year, except for tax burden, which is shown in percentage terms.


Net borrowing			1.9
Primary balance			3.1
Tax burden			43.3
Current revenues			46.9
Total revenues			47.2
Current expenditures			44.6
Total expenditures (net of interest)			44.1
Total expenditures			49.1


Source: ISTAT.

REPUBLIC OF ITALY

Area and Population

Geography. The Republic of Italy is situated in south central Europe on a peninsula approximately 1,120 kilometers (696 miles) long and includes the islands of Sicily and Sardinia in the Mediterranean Sea and numerous smaller islands. To the north, Italy borders on France, Switzerland, Austria and Slovenia along the Alps, and to the east, west and south it is surrounded by the Mediterranean Sea. Its total area is approximately 301,300 square kilometers (116,336 square miles), and it has 7,375 kilometers (4,582 miles) of coastline. The independent States of San Marino and Vatican City, whose combined area is approximately 61 square kilometers (24 square miles), are located within the same geographic area. The Apennine Mountains running along the peninsula and the Alps north of the peninsula give much of Italy a rugged terrain.

Population. According to ISTAT data, as of January 1, 2006, Italy’s resident population was estimated to be approximately 58.8 million, accounting for approximately 12.7 per cent of the European Union, or EU, population (including the 10 member states that joined on May 1, 2004) compared to 58.5 million as at January 1, 2005. The growth in Italy’s population was largely due to the increase in foreigners holding permits to live in Italy. Italy is the fourth most populated country in the European Union after Germany, France and the United Kingdom. According to ISTAT data, as of January 1, 2006, the six regions in the southern part of the peninsula together with Sicily and Sardinia, known as the “Mezzogiorno,” had a population of approximately 20.8 million. Northern and central Italy have a population of approximately 26.7 million and 11.3 million, respectively. The breakdown of the resident population by age group, as of January 1, 2006, was as follows:


•	under 20	19.0	%
•	20 to 39	27.9	%
•	40 to 59	28.0	%
•	60 and over	25.1	%


Source: ISTAT

In 2004, for the first time since 1993, the number of births in Italy exceeded the number of deaths. However, Italy’s fertility rate is still one of the lowest in the world, while life expectancy for Italians is among the highest in the world. Because population growth has been low in recent years, the average age of the population is increasing. Based on 2007 ISTAT data, population density is approximately 196.9 persons per square kilometer.

Rome, the capital and largest city, is situated near the western coast approximately halfway down the peninsula, and had a population of 2.5 million in 2004. The next largest cities are Milan, with a population of 1.3 million, Naples, with 1.0 million, and Turin, with 0.9 million. According to the 2001 census, approximately 44.2 per cent of Italy’s population lives in urban areas.

Like other EU countries, Italy has experienced significant immigration in recent years, particularly from North Africa and Eastern European countries. According to ISTAT data, at January 1, 2006 there were approximately 2.7 million foreigners holding permits to live in Italy,

a 11.2 per cent increase from January 1, 2005. Immigration legislation has been the subject of intense political debate since the early 1990s. Italy tightened its immigration laws in March 1998 and initiated bilateral agreements with several countries for cooperation in identifying illegal immigrants. Additional measures to further tighten immigration laws were introduced by the Italian government in early 2002 in an attempt to control the increase of illegal immigrants. In addition in 2002, the Italian government introduced measures aimed at regularizing the position of illegal immigrants. While these legislative efforts have resulted in regularization of large numbers of illegal immigrants, Italy continues to have high numbers of foreigners living in Italy illegally.

Government and Political Parties

Italy was originally a loose-knit collection of city-states, most of which united into one Kingdom in 1861. It has been a democratic republic since 1946. The Government operates under a Constitution, originally adopted in 1948, that provides for a division of powers among the legislative, executive and judicial branches.

The Legislative Branch. Parliament consists of a Chamber of Deputies, with 630 elected members, and a Senate, with 315 elected members and a small number of life Senators, consisting of former Presidents of the Republic and prominent individuals appointed by the President. The Chamber of Deputies and the Senate equally share and have substantially the same legislative power. Any statute must be approved by both assemblies before being enacted. Except for life Senators, members of Parliament are elected for five years by direct universal adult suffrage, although elections have been held more frequently in the past because the instability of multi-party coalitions has led to premature dissolutions of Parliament.

The Executive Branch. The head of State is the President, elected for a seven-year term by an electoral college that includes the members of Parliament and 58 regional delegates. The current President, Giorgio Napolitano, was elected in May 2006. The President has the power to appoint the Prime Minister and to dissolve Parliament. The Constitution also grants the President the power to appoint one-third of the members of the Constitutional Court, to call general elections and to command the armed forces. The President nominates and Parliament confirms the Prime Minister, who is the effective head of Government. The Council of Ministers is appointed by the President on the Prime Minister’s advice. The Prime Minister and Council of Ministers are responsible to both houses of Parliament and must resign if Parliament passes a vote of no confidence in the administration.

The Judicial Branch. Italy is a civil law jurisdiction. Judicial power is vested in ordinary courts, administrative courts and courts of accounts. The highest ordinary court is the Corte di Cassazione in Rome, where judgments of lower courts of local jurisdiction may be appealed. The highest of the administrative courts, which hear claims against the State and local entities, is the Consiglio di Stato in Rome. The Corte dei Conti in Rome supervises the preparation of, and adjudicates, the State budget of Italy. There is also a Constitutional Court (Corte Costituzionale) that does not exercise general judicial powers, but adjudicates conflicts among the other branches of government and determines the constitutionality of statutes. Criminal matters are within the jurisdiction of the criminal law divisions of ordinary courts, which consist of magistrates who

either act as judges in criminal trials or are responsible for investigating and prosecuting criminal cases.

The Annual Financial Law for 2008, enacted in December 2007, introduced into the Italian legal system, with effect as from June 2008, the “class action” for consumers’ protection. In accordance with the relevant provisions of Annual Financial Law for 2008, certain registered consumer associations and other entities will be able to bring a legal action in front of the competent courts (not only for each of themselves but) on behalf of all other individuals standing in the same situation. A class action may be initiated to claim damages in tort or for breach of contract.

Political Parties. The main political parties are grouped into two opposing coalitions: the Partito Democratico, which is headed by Mr. Walter Veltroni, and the Il Popolo delle Libertà. The Partito Democratico coalition was created in 2008 to combine Italy’s moderate centre-leftist forces. The Il Popolo delle Libertà, which is led by Mr. Silvio Berlusconi, was created in 2008 to combine center-right forces and Alleanza Nazionale, representing the right led by Mr. Gianfranco Fini. The Lega Nord is separate, but allied with, Il Popolo delle Libertà and is led by Mr. Umberto Bossi.

Elections. Except for a brief period, no one party has been able to command an overall majority in Parliament, and, as a result, Italy has a long history of weak coalition governments. In 1993, Parliament adopted a partial “first past the post” voting system for the election of 75 per cent of the members of both the Senate and the Chamber of Deputies. Under this system, the candidate receiving the largest number of votes in a single district wins. The remaining 25 per cent are elected through a proportional representation system. In the Chamber of Deputies, only parties that receive 4 per cent of the total vote on a nationwide basis are eligible for the seats elected by proportional representation. These modifications of the voting system have resulted in a significantly smaller number of Parliamentary seats held by parties with relatively small shares of the popular vote. Historically, however, government stability has depended on the larger parties’ coalitions with smaller parties.

In December 2005, a new law was enacted modifying the voting system for the Chamber of Deputies. In the Chamber of Deputies, votes will be given to lists of candidates presented by the single parties. Seats in the Chamber of Deputies will be awarded based on the number of votes obtained by each list, provided that multiparty coalitions and single parties are not eligible for any seat unless they attain at least 10 per cent and 4 per cent of the total votes, respectively. In addition, a “first past the post” type mechanism applies if the winning coalition does not obtain at least 340 seats (out of 630 seats) in the Chamber of Deputies. In order to ensure government stability, if the winning coalition does not obtain at least 340 seats, it is automatically awarded as many seats as it needs to reach 340 seats. This modified voting system was utilized for the first time for the general elections in April 2006.

On January 24, 2008, Mr. Romano Prodi resigned as Prime Minister after being defeated in a vote of confidence in the upper house of the Parliament, the Senate. Following such event, Italy’s President, Mr. Giorgio Napolitano, dissolved the Parliament on February 6, 2008. National elections were held on April 13 and 14, 2008, following which the centre-right, led by

Mr. Silvio Berlusconi, obtained the majority of the votes. As a result, Mr. Berlusconi is expected to form a new government shortly.

Political Regions. Italy is divided into 20 regions containing 103 provinces. The Italian Constitution reserves certain functions, including police services, education and other local services, to the regional and local governments. Following a Constitutional reform passed by Parliament in 2001, additional legislative and executive powers were transferred to the regions. Legislative competence that historically had belonged exclusively to Parliament was transferred in certain areas (including, foreign trade, health and safety, ports and airports, transport network and energy production and distribution) to a regime of shared responsibility whereby the national government promulgates legislation defining fundamental principles and the regions promulgate implementing legislation. Furthermore, in all areas that are not either subject to exclusive competence of Parliament or in a regime of shared responsibility between Parliament and the regions, exclusive regional competence will be conferred upon request of the relevant region, subject to Parliamentary approval. In addition, in accordance with this devolution program, regions have been granted the right to levy local taxes and collect national taxes referable to their territory. A portion of these national taxes will continue to accrue to a national fund to be divided among regions according to their needs.

The Italian Constitution grants special status to five regions (Sicily, Sardinia, Trentino-Alto Adige, Friuli-Venezia Giulia and Valle d’Aosta) providing them with additional legislative and executive powers.

Referenda. An important feature of Italy’s Constitution is the right to hold a referendum to abrogate laws passed by Parliament. Upon approval, a referendum has the legal effect of automatically annulling legislation to which it relates. Exceptions to this right are matters relating to taxation, as well as the State budget, the ratification of international treaties and judicial amnesties. A referendum can be held at the request of 500,000 signatories or five regional councils. In order for a referendum to be approved, a majority of the Italian voting population must vote in the referendum and a majority of such voters must vote in favor of the referendum.

The European Union

Italy is a founding member of the European Economic Community, which now forms part of the European Union. Italy is one of the 27 current members of the EU together with Austria, Belgium, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and the United Kingdom, together with Bulgaria and Romania, which joined the European Union on January 1, 2007. Together, the European countries had a population of approximately 496 million as of January 1, 2005.

The European Union is currently negotiating the terms and conditions of accession to the EU of the following candidate countries: Croatia, the Former Yugoslav Republic of Macedonia and Turkey.

EU member states have agreed to delegate sovereignty for certain matters to independent institutions that represent the interests of the union as a whole, its member states and its citizens. Set forth below is a summary description of the main EU institutions and their role in the European Union.

The Council of the EU. The Council of the EU, or the Council, is the EU’s main decision-making body. It meets in different compositions by bringing together on a regular basis ministers of the member states to decide on matters such as foreign affairs, finance, education and telecommunications. When the Council meets to address economic and financial affairs it is referred to as ECOFIN. The Council mainly exercises, together with the European Parliament, the European Union’s legislative function and promulgates:

	•		regulations, which are EU laws directly applicable in member states;

	•		directives, which set forth guidelines that member states are required to enact by promulgating national laws; and

	•		decisions, through which the Council implements EU policies

The Council also coordinates the broad economic policies of the member states and concludes, on behalf of the EU, international agreements with one or more States or international organizations. In addition, the Council:

	•		shares budgetary authority with Parliament;

	•		takes the decisions necessary for framing and implementing the common foreign and security policy; and

	•		coordinates the activities of member states and adopts measures in the field of police and judicial cooperation in criminal matters.

Decisions of the Council are taken by vote. Each Member State’s voting power is largely based on the size of its population. The following are the number of votes each Member State can cast:

	•		Germany, France, Italy and the United Kingdom each have 29 votes;

	•		Spain and Poland each have 27 votes;

	•		Romania has 14 votes;

	•		the Netherlands has 13 votes;

	•		Belgium, the Czech Republic, Greece, Hungary and Portugal each have 12 votes;

	•		Austria, Bulgaria and Sweden each have 10 votes;

	•		Denmark, Ireland, Lithuania, Slovakia and Finland each have 7 votes;

The European Commission. The European Commission traditionally upholds the interests of the EU as a whole and has the right to initiate draft legislation by presenting legislative proposals to the European Parliament and Council. Currently, the European Commission consists of 27 members, one appointed by each member state for five year terms.

Court of Justice. The Court of Justice ensures that Community law is uniformly interpreted and effectively applied. It has jurisdiction in disputes involving member states, EU institutions, businesses and individuals. A Court of First Instance has been attached to it since 1989.

Other Institutions. Other institutions that play a significant role in the European Union are:

	•		the European Central Bank, which is responsible for defining and implementing a single monetary policy in the euro area;

	•		the Court of Auditors, which checks that all the Union’s revenue has been received and that all its expenditures have been incurred in a lawful and regular manner and oversees the financial management of the EU budget; and

	•		the European Investment Bank, which is the European Union’s financial institution, supporting the EU objectives by providing long-term finance for specific capital projects.

Membership of International Organizations

Italy is also a member of the North Atlantic Treaty Organization (NATO), as well as many other regional and international organizations, including the United Nations and many of its affiliated agencies. Italy is one of the Group of Eight (G-8) industrialized nations, together with the United States, Japan, Germany, France, the United Kingdom, Canada and Russia and a member of the Organization for Economic Co-operation and Development (OECD), the World Trade Organization (WTO), the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (World Bank), the European Bank for Reconstruction and Development (EBRD) and other regional development banks.

THE ITALIAN ECONOMY

General

According to IMF data published in October 2007, the economy of Italy, as measured by its 2006 GDP, is the seventh largest in the world, after the United States, Japan, Germany, the People’s Republic of China, the United Kingdom and France.

The Italian economy developed rapidly in the period following World War II as large-scale, technologically advanced industries flourished along with more traditional agricultural and industrial enterprises. Between 1960 and 1974, Italian GDP, adjusted for changes in prices, or “real GDP,” grew by an average of 5.2 per cent per year. As a result of the 1973-74 oil price shocks and the accompanying worldwide recession, output declined by 2.1 per cent in 1975, but between 1976 and 1980 real GDP again grew by an average rate of approximately 4 per cent per year. During this period, however, the economy experienced higher inflation, driven in part by wage inflation and high levels of borrowing by the Government. For the 1980s as a whole, real GDP growth in Italy averaged 2.4 per cent per year.

Italy’s economic growth slowed down substantially in the 1990s. Tighter fiscal policy, which followed the lira’s suspension from the Exchange Rate Mechanism in September 1992, led Italy’s economy into recession and, in 1993, real GDP decreased by 0.9 per cent. The economy recovered in 1994 primarily as a result of an increase in exports resulting largely from the depreciation of the lira. The recovery continued in 1995, fueled by additional investment in the manufacturing sector. Expansion after 1995 continued at a more modest pace, with Italy’s GDP growth rate lagging behind those of other major European countries. Italy’s GDP grew by an average of 1.6 per cent per year from 1996 through 1999.

The table below shows the annual percentage change in real GDP growth for Italy and the countries participating in the EMU, including Italy, for the period 1996 through 2006.

Annual Per Cent Change in Real GDP


	1998		1999		2000		2001		2002		2003		2004		2005		2006		2007
Italy		1.4		1.9		3.6		1.8		0.5		0.0		1.5		0.6		1.8		1.5
Euro area⁽¹⁾		2.9		2.9		3.8		1.9		0.9		0.7		2.0		1.4		2.7		2.6


⁽¹⁾		The euro area represents the countries participating in the EMU.

Source:		Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006 and Combined Report on the Economy and Public Finance for 2008, published on March 12, 2008.

The growth gap between other EMU countries and Italy since the mid 1990s reflects the persistence of several medium and long-term factors, including the difficulties in fully integrating southern Italian regions into the more dynamic economy of northern and central Italy, unfavorable export specialization in traditional goods, inadequate infrastructure, the incomplete liberalization process and insufficient flexibility of national markets. The effects of these factors were aggravated by the crisis in the emerging markets of South-East Asia, the increasing

mobility of capital, the reduction of barriers to international competition and the reduction of subsidies for national industries.

Italy’s real GDP growth rate increased in the second half of 1999 and in 2000 due to improving exports, industrial production and growing domestic demand. The rapid decrease in real GDP growth recorded in 2001 and 2002 and the absence of GDP growth in 2003 was due to the general factors adversely affecting the Italian economy described above as well as a decrease in world trade resulting from the slowdown in the global and U.S. economies, the volatility of global financial markets and a rise in crude oil prices in 2000, which in turn resulted in a slowdown in domestic private sector consumption and investments and a decrease in net exports. In 2004, Italy recorded a recovery in real GDP growth, although at a rate lower than the average recorded in the euro area, largely as a result of a slowdown in internal consumption and fixed investment and the decrease in exports recorded during the second half of the year. The Italian economy slowed down again in 2005, as a result of Italy’s continuing inability to introduce structural reforms necessary to address its unfavorable specialization in export goods, its lack of adequate infrastructure and inflexible labor market. Low growth prospects also resulted in a significant reduction in internal private consumption and fixed investments, which remained substantially unchanged compared to 2004. In 2006, Italy’s real GDP grew faster than expected (1.8 per cent) as a result of strong world demand and the cyclical upturn in the euro area. The expansion began in the second half of 2005 and was driven by exports and investment, which were facilitated by favorable conditions in the credit market and rising business confidence.

The Italian Government historically has experienced substantial budget deficits. Among other factors, this is largely attributable to high levels of social spending and the fact that social services and other non-market activities of the central and local governments account for a relatively significant percentage of total employment as well as high interest expense resulting from the size of Italy’s public debt. Countries participating in the European Economic and Monetary Union are required to reduce “excessive deficits” and adopt budgetary balance as a medium-term objective. General government net borrowing was reduced to 2.8 per cent of GDP in 1998, mainly due to an increase in general government revenues resulting from the improving economy. Since 1998, Italy failed in 2001 and from 2003 to and including 2006 to maintain general government net borrowing as a percentage of GDP under the 3 per cent reference value set by the Maastricht Treaty. In the remaining years it satisfied the Maastricht criteria, largely as a result of extraordinary one-off measures, such as the sale of UMTS licenses in 2000 and the disposal of state-owned real estate in 2002. In 2006, net borrowing as a percentage of GDP decreased in the euro area, falling to 1.6 per cent. During the same period, Italy’s net borrowing as a percentage of GDP decreased from 4.2 per cent in 2005 to 3.4 per cent. The 2006 result was affected by a number of extraordinary transactions that have had both positive and negative impacts. For more information on these transactions, see “Public Finance — Measures of Fiscal Balance” and “Public Finance — Revenues and Expenditures.”

A longstanding objective of the Government has been to control Italy’s debt-to-GDP ratio. Government debt relative to GDP fell from 121.5 per cent in 1994 to 103.8 per cent of GDP in 2004, largely as a result of receipts from privatizations of State-owned assets; however, it remains above the 60 per cent debt ceiling required under the Maastricht Treaty. The ratio of Government debt-to-GDP rose for the second consecutive year, from 105.8 in 2005 to 106.5 in 2006. The increase in Italy’s debt-to-GDP ratio reflects Italy’s decreasing primary balance and

the absence of extraordinary measures (for example, privatizations, securitization of real estate assets) to reduce public debt in 2005 and 2006. The slower increase in the debt-to-GDP ratio in 2006 compared to 2005 resulted from faster GDP growth in 2006. Based on Italy’s Combined Report on the Economy and Public Finance published in March 2008, debt-to-GDP is estimated to decrease to 104.0 per cent in 2007.

Historically, Italy has had a high but declining savings rate. As a percentage of gross national disposable income, which measures aggregate income of a country’s nationals after providing for capital consumption (the replacement value of capital used up in the process of production), private sector saving averaged 28.3 per cent in the period from 1981 to 1990 and 24.5 per cent in the period from 1991 to 2000. Private sector saving as a percentage of gross national disposable income averaged 20 per cent in the period from 2003 to 2006. Because of the high savings rate, the Government has been able to raise large amounts of funds through issuances of Treasury securities in the domestic market, with limited recourse to external financing.

The Italian economy is characterized by significant regional disparities, with the level of economic development of southern Italy well below that of northern and central Italy. According to the Bank of Italy, the per capita GDP of southern Italy, also known as the Mezzogiorno, was 57.8 per cent of the per capita GDP of northern Italy in 1989 and declined progressively to 57.0 per cent in 2000. The marked regional divide in Italy is also evidenced by a difference in unemployment rates. While unemployment in the north of Italy was 4.4 per cent in 2006, well below the average unemployment rate of countries in the euro area of 7.9 per cent in 2006, the unemployment rate in the Mezzogiorno was significantly higher at 12.2 per cent in 2006, having decreased from 14.2 per cent in 2005.

While the employment rate grew steadily from 55.6 per cent in 2001 to 58.4 per cent in 2006, it remained well below the average employment rate of countries in the euro area, which grew from 62.3 per cent in 2001 to 64.4 per cent in 2006. The number of employed persons in Italy increased by 1.7 per cent in 2006, one of the largest increases in the last thirty years. See “— Employment and Labor.”

Inflation, as measured by the harmonized consumer price index, has declined from rates exceeding 20 per cent in the early 1980s to 2.1 per cent in 2006. See “— Prices and Wages.”

2007 Developments

Italy’s real GDP growth rate is estimated at 1.5 per cent during 2007, compared to 1.8 per cent in 2006, based on ISTAT data. This growth was mainly driven by private sector consumption. Italy’s seasonally adjusted average unemployment rate decreased to 5.9 per cent in 2007, from 6.8 per cent recorded during the previous year. Consumer prices, as measured by the harmonized EU consumer price index, increased at an annual rate of 2.0 per cent during the twelve months ended December 31, 2007, compared to a 2.2 per cent increase during the twelve months ended December 31, 2006.

On February 29, 2008, ISTAT published updated public finance estimates for 2007, which are set forth below and shown as percentages of the estimated GDP for the same period, except for tax burden, which is shown in percentage terms.


	2007
Net borrowing		1.9
Primary balance		3.1
Tax burden		43.3
Current revenues		46.9
Total revenues		47.2
Current expenditures		44.6
Current expenditures (net of interest)		44.1
Total expenditures		49.1

Gross Domestic Product

From 1996 to 1999, average annual real GDP growth in Italy was 1.5 per cent, compared to 2.5 per cent in the euro area, reflecting a range of factors including weak demand in key European export markets, the effects of the Asian crisis in 1998, declining private consumption and weak disposable income growth. During this period Italy also suffered the lagged effects of fiscal tightening and reform of its social security and welfare systems. In 2000, Italy’s GDP growth rose to 3.6 per cent, compared to 3.8 per cent in the 13 country euro area, as the declining exchange rate of the euro and improved economies outside the EU contributed to a significant increase in incoming orders for manufacturing goods and also due to sustained internal demand and investment. The rapid decline in Italy’s GDP growth rate in 2001, 2002 and 2003 was due to the decrease in world trade resulting from the slowdown in the global and U.S. economies, the volatility of financial markets, a slowdown in domestic private sector consumption and investments and a decrease in exports. In 2004, Italy recorded a recovery in real GDP growth as the world economy began expanding following the slowdown in the three prior years. However, GDP grew at a slower rate than the average recorded in the euro area, largely as a result of a slowdown in internal consumption and fixed investment and the decrease in exports recorded during the second half of the year. The slow growth recorded in 2005 was mainly due to Italy’s continuing inability to introduce structural reforms necessary to address its unfavorable specialization in export goods, its lack of adequate infrastructure and inflexible labor market. Low growth prospects also resulted in a significant reduction in internal private consumption and fixed investments, which remained substantially unchanged compared to 2004. In 2006, Italy recorded real GDP growth of 1.8 per cent, compared to 0.6 per cent in 2005. This increase was principally due to strong world demand and the cyclical upturn in the euro area.

The following tables set forth information relating to nominal (unadjusted for changing prices) and real GDP and expenditures for the periods indicated.

GDP Summary


	2002		2003		2004		2005		2006
Nominal GDP (millions of €)		1,295,226		1,335,354		1,390,539		1,428,375		1,479,981
Real GDP⁽¹⁾(millions of €)		1,216,589		1,217,041		1,231,689		1,232,773		1,255,848
Real GDP % Change		0.3%		—		1.5%		0.6%		1.8%
Population (in thousands)		57,321		57,888		58,462		58,751		59,131
Nominal per capita GDP		22,596		23,068		23,785		24,312		25,028
Real per capita GDP⁽¹⁾		21,224		21,024		21,068		20,983		21,238


⁽¹⁾		Constant euro with purchasing power equal to the average for 2000.

Source: Bank of Italy, ISTAT and Ministry of Economy.

Real GDP and Expenditures


	2002		2003		2004		2005		2006
Real GDP		1,216,589		1,217,041		1,231,689		1,232,773		1,255,848
Add: Imports of goods and services		309,145		311,589		319,906		321,541		335,294
of which
Goods		245,793		248,275		257,417		258,344		270,499
Services		63,353		63,315		62,488		63,198		64,795
Total supply of goods and services		1,525,726		1,528,574		1,551,308		1,553,972		1,590,801
Less: Exports of goods and services		310,783		303,219		313,270		311,694		328,106

of which
Goods		251,172		244,935		252,672		251,461		264,796
Services		59,611		58,284		60,597		60,232		63,311
Total goods and services available for domestic expenditure		1,214,943		1,225,355		1,238,038		1,242,278		1,262,695


Domestic expenditure
Private sector consumption		715,871		722,865		727,751		732,064		742,743
Public sector consumption		236,795		241,662		245,627		249,418		248,771

Total domestic consumption		952,666		964,527		973,378		981,482		991,514
Gross fixed investment		257,969		253,576		257,766		256,468		262,462
Total domestic expenditures⁽¹⁾		1,210,635		1,218,103		1,231,144		1,237,950		1,253,976


⁽¹⁾		Total goods and services available for domestic expenditure do not match total domestic expenditure figures due to the effects of rounding.

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

Real GDP and Expenditures


	2002			2003			2004			2005			2006
				(As a percentage of GDP)
Real GDP		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Add: Imports of goods and services		25.4	%		25.6	%		26.0	%		26.1	%		26.7	%
Total supply of goods and services		125.4	%		125.6	%		126.0	%		126.1	%		126.7	%
Less: Exports of goods and services		25.5	%		24.9	%		25.4	%		25.3	%		26.1	%
Total goods and services available for domestic expenditure		99.9	%		100.7	%		100.5	%		100.8	%		100.6	%


Domestic expenditure
Private sector consumption		58.8	%		59.4	%		59.1	%		59.4	%		59.1	%
Public sector consumption		19.5	%		19.9	%		19.9	%		20.2	%		19.8	%
Total domestic consumption		78.3	%		79.3	%		79.0	%		79.6	%		79.0	%
Gross fixed investment		21.2	%		20.8	%		20.9	%		20.8	%		20.9	%
Total domestic expenditure		99.5	%		100.1	%		100.0	%		100.4	%		99.9	%

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

Private Sector Consumption. The growth of private sector consumption, comprising the expenditure by households on goods and services other than new housing, dropped to 0.2 per cent in 2002 followed by an increase to 1.0 per cent in 2003. In 2004 and 2005, private sector consumption growth decreased to 0.7 per cent and 0.6 per cent, respectively. Conversely, in 2006, it registered a rise of 1.5 per cent. By comparison, in the euro area, private sector consumption growth rose from 1.0 per cent to 1.5 per cent in 2003, 2004 and 2005, respectively and increased further to 1.7 per cent in 2006. The growth of private sector consumption in Italy in 2006 reflected an increase in the demand for semi-durable goods (such as clothing), durable goods (principally transport, white goods and furniture) and services (particularly entertainment and cultural services). In line with the trend recorded in 2005, consumer confidence in Italy remained low in 2006 due to uncertainties regarding Italy’s persistent economic slowdown. Private sector consumption represented 59.1 per cent of GDP in 2006 and its contribution to real GDP growth during the same period was 0.9 per cent, compared to 0.4 per cent in 2005.

Public Sector Consumption. Public sector consumption, or the expenditure on goods and services by the general government, decreased by 0.3 per cent in 2006, compared to a 1.5 per cent rise in 2005. Public sector consumption represented 19.8 per cent of GDP in 2006 and it contributed negatively to the real GDP growth by 0.1 per cent during the same period, compared to a positive contribution of 0.3 per cent in 2005.

Gross Fixed Investment. Gross fixed investment in Italy, comprising spending on capital equipment and structures, including purchases of new housing, increased by 2.3 per cent in 2006, compared to 0.5 per cent decrease in 2005. In the euro area gross fixed investment increased by 4.7 per cent in 2006 and by 2.5 per cent in 2005. Italy’s increase in gross fixed investments was principally due to a significant rise in operational revenue growth in the industry sector. The most significant rises were recorded in capital spending on transport machinery (3.7 per cent in 2006 compared to a 3.5 per cent decrease in 2005), non-tangible assets (7 per cent in 2006 compared to a 2.9 decrease in 2005) and residential buildings. Investment in transport machinery increased by 3.7 per cent, compared to a 3.5 per cent decrease in 2005. Investment in

construction grew by 2.1 per cent in 2006, compared to 0.3 per cent in 2005, mainly due to the rise of residential construction activity, which was equal to 4 per cent, almost twice as large as for the sector as a whole. Gross fixed investment contributed to real GDP growth by 0.5 per cent during 2006, compared to a negative contribution of 0.1 per cent in 2005.

Net Exports. In 2006, Italy’s exports of goods and services increased by 5.3 per cent, compared to a 0.5 per cent decrease in 2005, while imports of goods and services increased by 4.3 per cent, compared to a 0.5 per cent increase in 2005. The growth rate in Italian exports registered in 2006 was the best result since the peak of the cycle in 2000. In 2006, net exports contributed by 1.4 per cent to real GDP growth.

Regional GDP. In the period between 1996 and 2006, average annual GDP growth in southern Italy was in line with the growth experienced by northern and central Italy. Northern and central Italy GDP growth was 0.3, 1.4 and 0 per cent in 2003, 2004 and 2005, respectively, while southern Italy GDP growth was 0.4, 0.7 and 0.3 per cent, respectively, in those years. In 2006, northern and central Italy GDP rose by 2.0 per cent, while in southern Italy it grew by 1.5 per cent.

In 2006, per capita GDP in the Mezzogiorno was 58 per cent of that of the rest of Italy. Irregular workers (unregistered workers and registered workers with unregistered second jobs) in the Mezzogiorno were estimated to constitute a significant proportion of the overall workforce in industry and services available in that region.

GDP Growth. Structural shortcomings have hindered Italy’s productivity. Italy’s share of goods with low value added and high price elasticity is higher than that of any other large industrialized country. As a result, it is more exposed to competition from emerging economies. This was particularly evident in 1997 and 1998 when world prices for goods produced in Asia fell sharply. In addition, most output is produced by small firms that cannot achieve economies of scale in production. During late 1999 and 2000, however, the declining exchange rate of the euro and improved economies outside the EU contributed to a significant increase in incoming orders for manufactured goods. Exports growth declined in 2002 and 2003 due to the fall in worldwide demand and the continuing loss in competitiveness of Italian products, while in 2004 exports grew at a rate of 3.3 per cent, mainly as a result of an increase in worldwide demand. In 2005, Italy recorded a 0.5 per cent decrease in exports and this largely resulted from the inadequacy of a production model that, on the one hand, prevented Italy from taking advantage of the increasing world demand for high technology items and, on the other hand, relegated it to the exports of goods with low value added where the competition of emerging economies was stronger. In 2006, exports grew by 5.3 per cent, the best result since the peak of the previous cycle in 2000. This growth was primarily due to an increase in exports to Germany, China and Russia. Based on ISTAT data published in February 2008, GDP grew at a rate of 1.5 per cent in 2007, compared to 1.9 per cent estimated in Italy’s Update to the Stability Program published in November 2007.

An improvement in the outlook for recovery in GDP growth depends on the successful adoption of Government designed policies to:

•

promote investments in infrastructure and strategic areas;

	•		foster market liberalization and reduce administrative bureaucratic charges and procedures;

	•		reduce the tax burden;

	•		preserve the private sector purchasing power; and

	•		undertake structural measures to contain the growth of government expenditure.

Strategic Infrastructure Projects. Italy’s economic infrastructure is still significantly underdeveloped compared to other major European countries.

Law No. 443/2001 (the “Strategic Infrastructure Law”), as subsequently amended, provides the government with special powers for the planning and realization of those infrastructure projects considered to be of strategic importance for the growth and modernization of the country, particularly the Mezzogiorno. The Strategic Infrastructure Law aims at simplifying the administrative process necessary to award contracts in connection with strategic infrastructure projects and increase the proportion of privately financed projects.

In the 2008-2011 Program Document, Italy confirmed its firm intention to pursue a substantial infrastructure program. However, the government stated that it was necessary to prioritize certain projects and delay others in light of Italy’s slow economic growth. On this new basis, priority was given to those projects which are already under development and, secondly, to those in respect of which engineering and building concessions have been awarded already. New projects will be commenced only to the extent they prove essential for improving the efficiency of the transport system as a whole and, provided adequate financial cover is available.

The government identified those infrastructures that require development or redevelopment between 2008 and 2011 and the economic resources for these projects in a “Priority Infrastructure Master Plan.” This plan includes projects for the construction of new railways along the Naples-Bari and Palermo-Messina routes and a rail link with Malpensa airport, an upgrade of the main motorways connecting North and Southern Italy and the implementation of projects aimed at relieving congestion in urban areas, including the Milan, Turin, Bologna, Rome and Naples underground systems. The cost of such projects amounts to approximately €32,150 million and will be financed by national and EU funds.

Principal Sectors of the Economy

The following tables sets forth value added at market prices by sector and the proportion of such sector on the total value added at market prices.

Value Added at Market Prices by Sector


	2002					2003					2004					2005					2006
	€ in		% of			€ in		% of			€ in		% of			€ in		% of			€ in		% of
	millions		Total			millions		Total			millions		Total			millions		Total			millions		Total

Agriculture, fishing and forestry		28,130		2.6	%		26,754		2.5	%		30,253		2.8	%		28,915		2.6	%		28,007		2.5	%
Industry
Manufacturing		218,202		20.0	%		212,974		19.6	%		210,275		19.2	%		205,007		18.7	%		212,499		19.0	%
Construction		58,638		5.4	%		60,262		5.5	%		60,813		5.5	%		61,259		5.6	%		62,248		5.6	%
Extractive industries and production and distribution of energy, gas, steam and water		27,295		2.5	%		26,964		2.5	%		27,680		2.5	%		28,686		2.6	%		27,002		2.4	%
Total industry		304,135		27.9	%		300,200		27.6	%		298,768		27.2	%		301,749		27.5	%		301,749		27.0	%
Market Services
Commerce and repairs		135,323		12.4	%		131,629		12.1	%		136,114		12.4	%		138,995		12.6	%		142,097		12.7	%
Hotels and restaurants		39,290		3.6	%		38,428		3.5	%		38,529		3.5	%		39,553		3.6	%		41,088		3.7	%
Transport and communications		86,017		7.9	%		87,519		8.1	%		89,719		8.2	%		90,439		8.2	%		92,571		8.3	%
Financial services		48,595		4.5	%		48,773		4.5	%		49,718		4.5	%		50,238		4.6	%		51,410		8.3	%
IT, research and professional activity		109,273		10.0	%		110,807		10.2	%		109,256		10.0	%		107,565		9.8	%		108,675		4.6	%
Real estate leases		118,305		10.9	%		121,151		11.2	%		120,122		11.0	%		121,348		11.0	%		121,929		9.7	%
Total market services		536,803		49.3	%		538,307		49.6	%		543,458		49.6	%		548,138		49.9	%		557,770		10.9	%
Non-market Services
Public administration		65,340		6.0	%		66,532		6.1	%		67,799		6.2	%		68,910		6.3	%		70,426		6.3	%
Education		54,408		5.0	%		55,114		5.1	%		55,111		5.0	%		55,216		5.0	%		55,466		5.0	%
Public health and social services		60,282		5.5	%		60,597		5.6	%		62,015		5.7	%		63,064		5.7	%		63,024		5.6	%
Household services		9,811		0.9	%		9,789		0.9	%		10,211		0.9	%		10,591		1.0	%		10,754		1.0	%
Other services		30,468		2.8	%		29,230		2.7	%		29,259		2.7	%		29,386		2.7	%		30,258		2.7	%
Total non-market services		220,309		20.2	%		221,262		20.4	%		224,395		20.5	%		227,167		20.7	%		229,928		20.6	%
Value added at market prices		1,089,008		100.0	%		1,086,032		100.0	%		1,096,576		100.0	%		1,099,043		100.0	%		1,117,610		100.0	%


(1)		Value added in this table is calculated by reference to market prices of products and services, excluding any taxes on any such products.

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

Value Added Growth by Sector


	Real GDP % Growth by Sector
	2002			2003			2004			2005			2006
Agriculture, fishing and forestry		(3.1	)%		(4.9	)%		13.1	%		(4.4	)%		(3.1	)%
Industry
Manufacturing		(1.3	)%		(2.4	)%		(1.3	)%		(2.5	)%		3.7	%
Construction		2.4	%		2.8	%		0.9	%		0.7	%		1.6	%
Extractive industries and production and distribution of energy, gas, steam and water		3.2	%		(1.2	)%		2.7	%		3.4	%		(5.7	)%
Total industry		(0.2	)%		(1.3	)%		(0.5	)%		1.0	%		0.0	%
Market Services
Commerce and repairs		(2.2	)%		(2.7	)%		3.4	%		2.1	%		2.2	%
Hotels and restaurants		(4.9	)%		(2.2	)%		0.3	%		2.7	%		3.9	%
Transport and communications		4.3	%		1.7	%		2.5	%		0.8	%		2.4	%
Financial services		(4.1	)%		0.4	%		1.9	%		1.0	%		2.3	%
IT, research and professional activity		5.9	%		1.4	%		(1.4	)%		(1.5	)%		1.0	%
Leases		2.3	%		2.4	%		(0.8	)%		1.0	%		0.5	%
Total market services		1.0	%		0.3	%		1.0	%		0.9	%		1.8	%
Non-market Services
Public administration		1.6	%		1.8	%		1.9	%		1.6	%		2.2	%
Education		3.0	%		1.3	%		0.0	%		0.2	%		0.5	%
Public health and social services		1.2	%		0.5	%		2.3	%		1.7	%		(0.1	)%
Household services		1.8	%		(0.2	)%		4.3	%		3.7	%		1.5	%
Other services		(3.8	)%		(4.1	)%		0.1	%		0.4	%		3.0	%
Total non-market services		1.0	%		0.4	%		1.4	%		1.2	%		1.2	%
Value added at market prices		3.3	%		(0.3	)%		1.0	%		0.2	%		1.7	%


Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

Role of the Government in the Economy

Until the early 1990’s State-owned enterprises played a significant role in the Italian economy. The State participated in the energy, banking, shipping, transportation and communications industries, among others, and owned or controlled approximately 45 per cent of the Italian industrial and services sector and 80 per cent of the banking sector. As a result of the implementation of its privatization program, which started in 1994 and is ongoing, the State exited completely the insurance, banking, telecommunications and tobacco sectors and reduced significantly its interest in the energy sector (principally through sales of shareholdings in ENI S.p.A. (“ENI”) and ENEL S.p.A. (“ENEL”)) and in the defense sector (principally through sales of shareholdings in Finmeccanica S.p.A.). See “Monetary System — Banking Regulation — Structure of the Banking Industry” and “Public Finance — Government Enterprises and— Privatization Program.”

Services

In 2006, services represented 70.5 per cent of GDP and 66.8 per cent of total employment. Among the most important service sectors are:

	•		transport and communications, which accounted for 8.3 per cent of GDP in 2006;

	•		commerce, hotels and restaurants, which accounted for 16.4 per cent of GDP in 2006;

	•		information technology, research and professional services, which accounted for 12.9 per cent of GDP in 2006; and

	•		real estate leases, which accounted for 9.7 per cent of GDP in 2006.

Transport. Italy’s transport sector has been relatively fast-growing and, during the period from 1980 to 1996, grew at more than twice the rate of industrial production growth. The expansion of the transport sector was largely the result of trade integration with European markets. Historically, motorways and railways have been controlled, directly and indirectly, by the Government and railways in particular have posted large financial losses. In recent years many of these enterprises have been restructured in order to place them on a sounder financial footing and/or privatized.

Roadways are the dominant mode of transportation in Italy. The road network includes, among others, municipal roads that are managed and maintained by local authorities, roads outside municipal areas that are managed and maintained by the State Road Board (ANAS) and a system of toll highways that in part are managed and maintained by several concessionaries, the largest of which is controlled by Autostrade S.p.A. (“Autostrade”), which was privatized in 1999. Autostrade manages approximately 3,400 kilometers, of the approximately 6,500 kilometer system of motorways, under several concessions granted by ANAS. Toll motorways represent approximately 84.6 per cent of the total motorway network.

Italy’s railway network is small in relation to its population and land area. Approximately 30 per cent of the network carries 80 per cent of the traffic, resulting in congestion and under-utilization of large parts of the network. There are approximately 22,200 kilometers of railroad track, of which a large majority are controlled by State-owned railways, with the remainder controlled by private firms operating under concession from the Government. In 2006, Italian railways carried approximately 22.2 billion tons-km of freight and recorded 46.1 billion passengers-km. The Government historically has provided substantial operating subsidies to the State-owned railroads, making passenger tickets less expensive than for most European railroads. In addition, the railway system historically has suffered from overstaffing, high costs and inadequate infrastructure. However, the Government has been restructuring the Italian railway system to improve its efficiency, expand the network and upgrade existing infrastructure.

In 1992, the Italian State railway company was converted from a public law entity into a commercial State-owned corporation, Ferrovie dello Stato S.p.A. or FS, with greater autonomy over investment, decision-making and management. In 2006, the total annual capital expenditure in fixed assets by Ferrovie dello Stato totaled €7,263 million, compared to €2,720 million in 1997. In 2006, Ferrovie dello Stato’s revenues amounted to €6,706 million compared to €6,875

million in 2005. Operating costs increased from €6,747 million in 2005 to €7,356 in 2006 mainly as a result of extraordinary repair and maintenance work, an increase in passenger services provided on trains and the implementation of a new collective bargaining agreement which resulted in a rise in wages and salaries. Due to the increase in operating costs and the decrease of the Italian State’s subsidies to Ferrovie dello Stato, Ferrovie dello Stato recorded a consolidated loss of €2,115 million in 2006, compared to a €465 million loss in 2005.

In response to EU directives and intervention by the Italian Antitrust Authority (Autorità Garante della Concorrenza e del Mercato), since March 1999 Italy has been implementing a plan aimed at preparing Italy’s railways for competition. Italy liberalized railway transportation by creating two separate legal entities wholly owned by Ferrovie dello Stato: Trenitalia S.p.A., managing the transportation services business and Rete Ferroviaria Italiana S.p.A. (“RFI”) managing railway infrastructure components and the efficiency, safety and technological development of the network.

The Government plans to privatize the freight and intercity businesses, while the local transport and infrastructure divisions will continue to be Government-operated. The Government’s objective is to devolve to the regions a significant part of the State responsibilities for local railways. Under the planned decentralization process, regions will become responsible for the whole range of local transportation services through contracts entered into with the State. The international segment of railway transport was liberalized in 2000 and as of May 20, 2007, 40 licenses had been granted to international operators.

Projects for new high-speed train systems (Treno ad alta velocità, or TAV) linking the principal urban centers of Italy with one another and with neighboring European countries, as well as other infrastructure projects designed to upgrade the railway network, are under way or, in some cases, have been completed.

Gioia Tauro (in the proximity of Reggio Calabria) is the largest Mediterranean port for container shipping. During the late 1990s, Istituto per la Ricostruzione Industriale or IRI, a State holding company, completed the privatization of its international maritime companies. Tirrenia, a state-owned company, operates ferry operations and regional maritime activities.

Alitalia, Italy’s national airline was partially privatized in 1998 and re-capitalized in early 2002. Currently, 51.1 per cent is owned by the public with the remainder held by the Ministry of Economy and Finance. In January 2007, the Government announced its intention to sell a shareholding of not less than 30.1% in the company, subsequently increased to 39.9% and all the Alitalia convertible bonds owned by the Ministry of Economy and Finance. However, the competitive bid process for the sale of the Government stake in Alitalia failed and during 2007, following the Government’s confirmation of its intention to transfer the control of Alitalia to private investors, Alitalia received three non binding offers for the purchase of a controlling stake in the company. In December 2007, Alitalia selected one of the bidders, Air France-KLM, as the entity with whom the company would hold negotiations on an exclusive basis. In 2006, Alitalia recorded losses of approximately €626 million, compared to losses of approximately €168 million in 2005.

Passenger air traffic in Italy is concentrated, with approximately 57 per cent of all air traffic in 2005 attributable to Fiumicino and Ciampino airports in Rome and Linate and Malpensa airports in Milan.

Communications. In 1997, Parliament enacted legislation to reform the telecommunications market with the aim of promoting competition in accordance with EU directives. This legislation permits companies to operate in all sectors of the telecommunications market, including radio, television and telephone, subject to certain antitrust limitations and provided for the appointment of a supervisory authority. The Italian Telecommunication Authority (Autorità per le Garanzie nelle Comunicazioni, or AGCOM), consists of eight members appointed by Parliament and a president appointed by the Government. It is responsible for issuing licenses and has the power to regulate tariffs and impose fines and other sanctions. Each fixed and mobile telephony operator must obtain an individual license, which is valid for 15 years and renewable.

Italy’s telecommunications market is one of the largest in Europe, utilizing an aggregate of approximately 27.4 million fixed lines as of December 31, 2005. As of December 31, 2006, the Italian telecommunications market had an aggregate of 80.4 million mobile telephone lines. The market was deregulated in January 1998 and while Telecom Italia, which was privatized in 1997, remains the largest operator, it is facing increasing competition from new operators that have been granted licenses for national and local telephone services. Competition among telecommunications operators has resulted in lower charges and a wider range of services offered. In January 2000, access to local loop telephony was liberalized.

In 1995, following the adoption of legislation aimed at developing competition in the mobile telephone business, Telecom Italia Mobile (TIM) was spun-off from Telecom Italia and publicly listed; however, in 2004, in furtherance of a restructuring plan aimed, inter alia, at strengthening its position in the market, TIM merged into Telecom Italia. The Government also granted mobile licenses to other mobile operators. TIM remains the largest mobile operator, followed by Vodafone Italia (controlled by the Vodafone Group) and Wind.

In 1998, the European Parliament authorized EU member countries to grant a limited number of Universal Mobile Telecommunication System, or UMTS, licenses for third-generation, or 3G, mobile telephony services, through which companies intend to provide additional and enhanced services including high-speed wireless internet access. The allocation process of UMTS licenses in Italy was implemented by an auction among pre-qualified applicants. In 2000, five UMTS licenses were granted for terms of fifteen years. Italy raised €13,815 million through the UMTS license auction.

Internet and personal computer penetration rates in Italy have grown substantially in recent years. The ratio of personal computers per household increased from 16.7 per cent in 1997 to 29.7 in 2000 and 46.1 per cent in 2006 while the proportion of PCs connected to the Internet increased to 35.6 per cent in 2006 from 2.3 per cent in 1997 and.

Tourism. Tourism is an important sector of the Italian economy. In 2006, tourism revenues, net of amounts spent by Italians traveling abroad, were approximately €12 billion, representing a 14.5 per cent increase from net tourism revenues in 2005. This reflected an increase in spending

by Italian tourists abroad of 2.2 per cent and an increase of 13.5 per cent in spending by foreign visitors in Italy. See “The External Sector of the Economy — Current Account.”

Financial Services. Historically, a significant proportion of Italy’s domestic investment has been in public debt. However, the percentage of domestic investment allocated to holdings of foreign assets, investment fund units and shares, increased from 18.5 per cent in 1995 to 37.7 per cent in 2006, while the percentage allocated to bonds decreased from 30.6 per cent in 1995 to 16.1 per cent in 2006. This shift generated a substantial increase in fee income for financial institutions.

Share prices rose in Italy in 2006. The Italian stock exchange recorded a 19 per cent average increase in share prices, in line with the Euro Stoxx index.

Italian household indebtedness as a percentage of disposable income grew from 25 per cent in 1996 to 47 per cent in 2006. However, it remains lower than in the euro area where household indebtedness as a percentage of disposable income was equal to 97 per cent in 2006. Bank lending to Italian residents generally has increased since 1997, accommodating economic expansion. The rate of growth in bank lending rose to 11.5 per cent in 2006 from 8.7 per cent in 2005. For a description of the Italian banking system, see “Monetary System — Banking Regulation.”

Manufacturing

In 2006, the manufacturing sector represented 19 per cent of GDP and 19.5 per cent of total employment. In 2006, manufacturing output increased by 3.7 per cent, compared to a 2.5 per cent decrease registered in 2005.

Italy has compensated for its lack of natural resources by specializing in transformational and processing industries. Italy’s principal manufacturing industries include metal products, precision instruments and machinery, textiles, leather products and clothing, wood and wood products, paper and paper products, food and tobacco, chemical and pharmaceutical products and transport equipment, including motor vehicles.

The number of large manufacturing companies in Italy is relatively small in comparison to other European Union countries. The most significant include Fiat (automobiles and other transportation equipment), Pirelli (tires, cables and industrial rubber products), Finmeccanica (aeronautics, helicopters, space and defense), Barilla (food), Luxottica (glasses) and Giorgio Armani (clothing). These companies export a significant share of their output and have significant market shares in their respective product markets in Europe.

Much of Italy’s industrial output is produced by small and medium-sized firms, which also account for much of the economic growth over the past 20 years. These firms are active especially in light industry (including the manufacture of textiles, clothing, food, shoes and paper), where they have been innovators, and export a significant share of their production. The profit margins of large manufacturing firms, however, generally, have been higher than those of their smaller counterparts. Various Government programs to support small firms provide, among other things, for loans, grants, tax allowances and support to venture capital entities.

Traditionally, investments in research and development (R&D) activities have been very limited in Italy. Total and corporate R&D spending has continued to be proportionally lower in Italy than in other industrial countries, reflecting Italian industry’s persistent difficulty in closing the technology gap with other advanced economies. Total R&D spending in Italy rose from 1.00 percent in 1995 to 1.10 per cent in 2004. This compares to total R&D spending as a percentage of GDP in 2004 of 2.50 per cent in Germany, 2.14 per cent in France, 1.77 per cent in the EU (including the ten EU member states which joined in May, 2004), 2.68 per cent in the United States and 3.18 per cent in Japan.

The following table shows industrial production by sector for the years indicated.

Industrial Production by Sector
(Index: 2000 = 100)


	2002		2003		2004		2005		2006
Energy products		103.8		108.3		111		115.2		115.2
Minerals, ferrous and non-ferrous metals		98.1		98.5		99.4		99.2		100.6
Chemicals and pharmaceutical products		100.7		98.3		100.8		99.1		102.7
Metal products		97.6		99.6		101.8		99.4		102.9
Agricultural and industrial machinery		101.4		97		98.1		98.9		103.2
Precision instruments and machines		91.7		83.8		83.8		75.9		80.8
Transport equipment		89		84.1		84		77.6		82.6
Food and tobacco		104.9		107		106.6		107.5		108
Textiles and clothing		91.8		88.5		84.8		77.5		77.2
Wood and wood products		100.1		98.3		100.8		98.7		99.4
Paper and paper products		99.1		100.9		107.3		106.2		104
Rubber and plastic materials		94.9		94.9		94.7		90.8		93.2
Other industrial products		98.4		88.4		88.3		85.3		81
Aggregate Index		97.8		96.8		97.4		95.7		96.2


Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

Energy Consumption

The demand for energy, measured in terms of million tons of oil equivalent, or MTOE, decreased by 2 per cent in 2006, compared to a 1.5 per cent increase in 2005. The decrease of energy demand was due to a decrease in demand for private consumption (2.7 per cent) and industry (0.5 per cent), partially offset by an increase in transportation (0.3 per cent) and “other uses” (0.4 per cent).

In 2006, oil represented 43.3 per cent of Italy’s primary energy consumption, with natural gas accounting for 35.6 per cent, renewable energy resources (which includes solar and wind energy, recyclable material, waste material and biogas) accounting for 7.2 per cent, solid combustibles accounting for 8.9 per cent and net purchased electricity accounting for 5 per cent.

In 2006, Italy imported 93.9 per cent of its oil requirements and 91.2 per cent of its natural gas requirements. The only other significant imported energy source is coal. A referendum held in 1987 rejected the use of nuclear power in Italy.

The domestic energy industry consists primarily of ENI, ENEL and Edison. ENI, approximately 20 per cent owned by the Government, is engaged in the exploration, development and production of oil and natural gas in Italy and abroad, the refining and distribution of petroleum products, petrochemical products, the supply, transmission and distribution of natural gas and oil field services contracting and engineering.

ENEL is the largest electricity company in Italy and is engaged principally in the generation, importation and distribution of electricity. The Government owns approximately 22 per cent of the share capital of ENEL directly and 10.35 per cent through Cassa Depositi e Prestiti S.p.A., which is 70 per cent owned by the Government. Domestic capacity is insufficient to meet current demand, and Italy imports a significant share of its electricity requirements.

The Electricity and Gas Authority (Autorità per l’Energia Elettrica e il Gas) regulates electricity activities and natural gas distribution in Italy with the aim of promoting competition while ensuring adequate levels of service quality. The Authority is led by a board of three members appointed by Parliament and has a large degree of independence and significant powers, including the power to establish base tariffs and the criteria for tariff adjustments and to issue fines and other sanctions. While several companies operate in the gas distribution market, during 2005 natural gas sales by ENI accounted for about 67.6 per cent of domestic consumption. Law 290/2003, in line with European Directives, provided for a partial liberalization of the natural gas market. Pursuant to that law, after July 1, 2007 no single operator could have a stake higher than 20% in the share capital of companies owning and managing natural networks for the transmission of natural gas and electricity. However, the Italian Budget Law for 2007 established that the term for the disposal envisaged by Law 290/2003 — which was extended to December 31, 2008 in the course of 2006 — would be 24 months from the effectiveness of the Italian Prime Minister’s decree which will implement Law 290/2003. Following the determination of gas transportation tariffs by the Authority, ENI sold a 40.2 per cent stake in the share capital of its distribution subsidiary, SNAM Rete Gas, through an initial public offering in December 2001 and a further 9.1 per cent interest in March 2004. As of December 31, 2006, ENI held a 50.04 per cent interest in SNAM Rete Gas.

In recent years, the Italian electricity sector has undergone significant changes. A Government decree issued in 1999, known as the Bersani Decree, established a general regulatory framework for the Italian electricity industry that has gradually introduced free competition in power generation and sales to consumers meeting certain consumption thresholds while maintaining a regulated monopoly structure for power transmission, distribution and sales to other consumers. In particular, the Bersani Decree and the subsequent implementing regulations:

	•		liberalized, as of April 1, 1999, the generation, import and export of electricity;

	•		liberalized the sale of electricity to consumers meeting certain consumption thresholds, or “Eligible Customers,” who may negotiate supply agreements directly with any domestic or foreign producer, wholesaler or distributor of electricity, and provided that other consumers, or “Non-Eligible Customers,” would have to purchase electricity from the distributor serving the area in which they are located and pay tariffs determined by the Electricity and Gas Authority;

	•		provided that after January 1, 2003, no electricity company is allowed to produce or import more than 50% of the total of imported and domestically produced electricity in Italy in order to increase competition in power generation;

	•		provided for the establishment of the Single Buyer, a central purchaser of electricity from producers on behalf of all Non-Eligible Customers;

	•		provided for the creation of the Borsa dell’Energia Elettrica, or pool market for electricity, in which producers, importers, wholesalers, distributors, the Gestore della Rete, other Eligible Customers and the Single Buyer participate, with prices being determined through a competitive bidding process;

	•		provided for the creation of the Gestore del Mercato, or Market Operator, charged with managing the pool market;

	•		provided that the transmission and distribution of electricity are reserved to the Italian government and performed by licensed operators, and in this respect:

	•		provided that management and operation of the national transmission grid is licensed to an independent system operator, the Gestore della Rete or System Operator, with owners of the transmission grid such as Terna S.p.A. (formerly owned by ENEL) retaining ownership of the grid assets; and

	•		established a new licensing regime for electricity distribution and provided incentives for the consolidation of electricity distribution networks within each municipality.

In accordance with the Bersani Decree, during 2000 ENEL established three new generating companies (Eurogen, Elettrogen and Interpower or, collectively, Gencos); representing approximately 25 per cent of ENEL’s generation capacity. In September 2001 a consortium led by Endesa, a Spanish utility, acquired Elettrogen, the second largest Genco, with a total generation capacity of 5,400 MW. In May 2002 Edipower S.p.A., a consortium led by Edison S.p.A. acquired Eurogen, the largest Genco with a total generation capacity of 7,000 MW. In November 2002, a consortium comprising Acea S.p.A., Electrobel S.p.A. and Energia Italiana acquired Interpower, the third Genco, with a total generation capacity of 2,611 MW.

Effective January 1, 2000, a new tariff regime, subsequently amended, significantly lowered fixed tariff rates for the generation, transmission and distribution of electricity.

Terna S.p.A., formerly controlled by ENEL, owns and operates approximately 94 per cent of the transmission assets of Italy’s national electricity grid, which was operated by the System Operator until October 31, 2005. In accordance with a governmental decree, enacted on May 11, 2004, and pursuant to an agreement entered into in February 2005, the System Operator transferred to Terna the responsibility to manage the national transmission grid and the related assets with effect from November 1, 2005. In addition, following the effectiveness of this transfer, ENEL is no longer entitled to control more than 5 per cent of the voting rights for the appointment of Terna’s directors. ENEL has complied with its obligation to reduce its holding in Terna to no more than 20 per cent by July 1, 2007. In June 2004, ENEL sold a 50 per cent interest in Terna through an initial public offering. A further 13.86 per cent interest was sold in

March 2005 through an accelerated bookbuilding process. In May 2005, ENEL entered into an agreement with Cassa Depositi e Prestiti S.p.A. for the sale of most of its remaining share in Terna (approximately 30 per cent). The agreement was executed in September 2005 for a consideration of €1.3 billion. As a result, ENEL reduced its shareholding in Terna to 6.1% per cent, which was further reduced to 5.0 per cent upon allocation of the bonus share granted to those who subscribed Terna’s shares in the IPO completed in June 2004.

In 2003, the EU adopted a new Directive and a Regulation to further liberalize the electricity market. The new Electricity Directive retains the main principles of the EU directive issued in December 1996, commonly referred to as the Electricity Directive, which it replaces. It enables all consumers to freely choose their electricity supplier by 2007, irrespective of consumption levels, with all non-household consumers enjoying this right of choice from 2004. Further, the new Electricity Directive introduced new definitions of public service obligations and security of supply, establishes a regulator in all EU member states with well defined functions and requires legal unbundling of network activities from generation and supply. The Regulation establishes common rules for cross-border trade in electricity and lays down principles on charges to be paid as a result of transit flows and access to networks as well as on congestion management. EU member states were required to implement the new Directive by July 1, 2004. Italy implemented part of the Directive in August 2004 through the “Marzano Law.”

The Marzano Law is aimed at reorganizing the existing energy market regulation and further liberalizing the natural gas and electricity markets. One of the purposes of the Marzano Law is to clarify the respective roles of the Italian central government, regional and local authorities, and the Electricity and Gas Authority. The Marzano Law also seeks to facilitate investment in the energy sector. To further liberalize the market, and consistent with the new Electricity Directive, the Marzano Law provides that all customers will be eligible to purchase electricity on the free market from July 1, 2007, although the law provides that the Single Buyer will nonetheless continue to supply electricity to customers who choose not to leave the regulated market.

The Marzano Law also authorizes the Italian government to limit the ability of companies based in other EU member states to invest in the Italian energy sector if their home country does not adequately guarantee a reciprocal ability for Italian companies to invest in its energy market.

On June 13, 2005, the EU Commission launched an inquiry into the functioning of the EU’s energy markets. This inquiry responded to concerns voiced by customers and new entrants in the sector about the development of wholesale gas and electricity markets and the limited choice available to customers. The Commission adopted its final report on January 10, 2007, concluding that customers and businesses are being adversely affected by inefficient and expensive gas and electricity markets. Specifically, the EU Commission noted the existence of high levels of market concentration, vertical integration of supply, generation and infrastructure resulting in a lack of equal access to the energy resources and possible collusion among incumbent operators to share markets. In order to tackle these problems, the Commission will pursue follow up actions in individual cases under applicable competition rules and acts to improve the regulatory framework for energy liberalization.

Construction

In 2006, construction represented 5.6 per cent of GDP and 7.7 per cent of total employment. In 2005 and 2006 construction activity grew by 0.7 and 1.6 per cent, respectively. Gross fixed investment in construction, which includes investment for building renovations and by the public administration, increased by 2.1 per cent in 2006, compared to 0.3 per cent in 2005 and 1.5 per cent in 2004.

Agriculture, Fishing and Forestry

In 2006, agriculture, fishing and forestry accounted for 2.5 per cent of GDP and 5.3 per cent of total employment. Agriculture’s share of Italian GDP has generally declined with the growth of industrial output since the 1960s. Italy’s average farm size remains less than half the European Union average. Italy is a net importer of all categories of food except fruits and vegetables. The principal crops are wheat (including the durum wheat used to make pasta), maize, olives, grapes and tomatoes. Cereals are grown principally in the Po valley in the north and in the southeast plains, olives are grown principally in central and southern Italy and grapes are grown throughout the country.

Employment and Labor

General. Job creation has been and continues to be a key objective of the Government. Employment as measured by the average number of standard labor units employed during the year increased cumulatively by approximately 3.8 per cent from 2001 to 2006. A standard labor unit is the amount of work undertaken by a full-time employee over the year and is used to measure the amount of work employed to produce goods and services. This increase was largely attributable to increases in part-time and temporary employment contracts entered into in the period from 2000 to 2003. While average employment remained substantially unchanged in 2005, as a result of improving economic conditions, it increased by 1.7 per cent in 2006, one of the largest rises in the last thirty years.

The unemployment rate has decreased every year since 1999 reaching 6.8 per cent for the year ended December 31, 2006, compared to 7.9 per cent in the euro area during the same year.

The following table shows the change in total employment, the official participation rate and the official unemployment rate for each of the last five years.

Employment


	2002			2003			2004			2005			2006
				(Average over the year)
Employment in standard labor units (% change on prior year)		1.27	%		0.63	%		0.37	%		(0.2	)%		1.63	%
Participation rate (%)⁽¹⁾		62.1			62.9			62.5			62.4			62.7
Unemployment rate (%)⁽²⁾		8.6			8.4			8			7.7			6.8


⁽¹⁾		Participation rate of population aged 15-64.

⁽²⁾		Does not include workers paid by Cassa Integrazione Guadagni or Wage Supplementation Fund, which compensates workers who are temporarily laid off or who have had their hours cut.

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

Employment by sector. Of the total employed workforce in 2006, approximately 66.8 per cent were employed in the service sector, 20.2 per cent were employed in industry (other than construction), 7.7 per cent worked in the construction sector, and 5.3 per cent worked in agriculture.

In 2006, average employment in industry, excluding construction, increased by 1.3 per cent as a result of growth in the manufacturing sector. This increase follows a declining trend of employment levels in the industry sector began in the 1980s, with employment in industry decreasing from 22.9 per cent of the total workforce in 1995 to 20.4 per cent in 2005.

In 2006, average employment in agriculture, forestry and fishing increased by 0.6 per cent. Average employment in agriculture, forestry and fishing has declined constantly since World War II except in 2001, 2004 and 2006. Employment in the agriculture sector declined from 7.3 per cent in 1996 to 5.3 per cent in 2006.

The largest contribution to employment growth in Italy in recent years has come from the services sector, which increased from 63.5 per cent of the total workforce in 1996 to 66.8 per cent in 2006. The growth was mainly attributable to business and household services, with all service sectors other than public administration, financial services and education experiencing employment growth.

Employment by geographic area and gender. Unemployment in southern Italy has been persistently higher than in northern and central Italy, and in 2006 was 12.2 per cent compared to 6.1 per cent in central Italy and 3.8 per cent in northern Italy. The unemployment rate in central and northern Italy declined steadily between 1996 and 2002, remaining substantially stable thereafter, while unemployment in southern Italy has fluctuated, increasing from 1996 to 1999 and decreasing by 7.4 per cent from 1999 to 2006.

While unemployment for women in Italy historically has been substantially higher than for men, it has decreased at a faster rate (from 13.6 per cent in 2000 to 8.8 per cent in 2006) than for

men (from 7.8 per cent in 2000 to 5.4 per cent in 2006). This is in part attributable to the substantial growth in female participation in the labor force, particularly among women aged 25-54. The proportion of economically active women increased from 45.1 per cent in 1996 to 50.8 per cent in 2006, while the participation rate of men increased from 72.6 per cent in 1996 to 74.6 per cent in 2006. Participation rates for women over age 40 and for women in southern Italy are significantly below European averages.

The Government believes that a substantial “hidden economy” exists in Italy, consisting of persons who claim, for tax and other purposes, to be unemployed but actually hold a job, or who claim to hold a job but also perform other income-earning activities. The hidden economy is believed to be particularly persistent in areas of high official unemployment and among immigrant workers. The increase in employment in 2001 and 2002 may partly be attributable to the “emergence” of workers that were not previously accounted for in national statistics. According to ISTAT data, in 2004 the hidden economy was estimated to equal between 16.6 per cent (equal to €231 billion) and 17.7 per cent (equal to €246 billion) of GDP. The hidden economy includes illegal activities and unreported income from the production of legal products and services.

Government programs and regulatory framework. The Government has adopted a number of programs aimed at correcting the imbalances in employment, including programs that provide money for job training, particularly in southern Italy, and certain incentives to companies that hire young workers. The Government’s target set forth in the 2008-2011 Program Document is to reduce unemployment to 5.7 per cent by 2011. During the period 2001-2005, the Government introduced tax incentives for employers in order to promote full-time permanent employment. Collective bargaining of industry-wide labor contracts is the principal means of determining working hour limitations.

Through the Cassa Integrazione Guadagni (“CIG”), or Wage Supplementation Fund, the Government guarantees a portion of the wages of workers in the industrial sector who are temporarily laid off or who have had their working hours reduced. Workers laid off permanently as a consequence of restructuring or other collective redundancies are entitled to receive unemployment compensation for a period of 12 months, which is extendable for up to three years for workers nearing retirement age. The number of hours of work paid through CIG declined steadily from 299.9 million hours in 1995 to 147.2 million hours in 2000 before increasing to approximately 230 million hours in 2005.

Italy’s labor market historically has been slow to respond to cyclical trends, contributing to a high unemployment rate. This has been attributed to the bargaining power of labor unions and a regulatory framework that makes dismissal of workers difficult. The persistence of high unemployment has contributed to a less confrontational stance on the part of the unions, leading to significant declines in the average number of person-hours lost per year in strikes and industrial actions, from 116.6 million in the period 1978-82 to 43.6 million in the period 1983-90 and 50.2 million in the period from 1991-1997. In the periods 1998-2001 and 2002-2006, an average of approximately 6 and 12.3 million person-hours per year were lost to strikes, respectively. The rising trend recorded in the last 5 years resulted from a phase of heated protests against Government reforms and international policy. After a peak of 34 million in 2002, the average number of person-hours lost per year declined to 13.1 million and 4.8 million in 2003

and 2004, respectively, increased to 6.3 million at the end of 2005 and finally decreased to 3.2 million at the end of 2006.

Prices and Wages

Wages. Unit labor costs historically have been lower in Italy, on average, than in most other European countries. This is due to lower average earnings per employee, combined with higher productivity levels.

Wages, as measured by gross earnings per standard labor unit decreased by an average of 2.8 per cent for the entire economy in 2006 compared with an increase of 3.3 per cent in 2005 and 3.4 per cent in 2004. During 2006, the growth in each of the public service sector and the private sector was 2.8 per cent. Labor costs per standard labor unit, measured in terms of unit remuneration (i.e. the total of gross wages and social security charges) increased by 2.5 per cent in 2006, compared to 3.1 per cent in 2005. Labor costs per product unit, or LCPU, decreased by 2.3 per cent in 2006 compared to 2.8 per cent in 2005, due to a weaker labor productivity, which grew by only 0.2 per cent in 2006, compared to 0.3 per cent in 2005.

Prices. The European Union harmonized consumer price index reflects the change in price of a basket of goods and services taking into account all families resident in a given territory. In 2006, the inflation rate in the euro area as measured by the European Union harmonized consumer price index fell to 1.9 per cent, from 2.2 per cent registered in 2005. Since Italy’s entry into the EMU in 1999, monetary policy decisions are made for all euro zone countries by the European Central Bank. See “Monetary System — Monetary Policy.”

Inflation in Italy, as measured by the harmonized consumer price index was 2.2 per cent in 2005 and in 2006, compared to 2.3 per cent in 2004. The 2006 figure was principally attributable to an increase in the prices of unprocessed and processed foods, partially offset by a slower growth of the core inflation index (which is the harmonized consumer price index net of energy, unprocessed food, alcohol and tobacco products) and in the prices of services and energy.

MONETARY SYSTEM

The Italian financial system consists of banking institutions such as commercial banks, leasing companies, factoring companies and household finance companies, as well as non-bank financial intermediaries such as investment funds, portfolio management companies, securities investment firms, insurance companies and pension funds.

Monetary Policy

The Eurosystem and the European System of Central Banks. As of January 1, 1999, which marked the beginning of Stage III of European Economic and Monetary Union, the 11 countries joining the EMU officially adopted the euro, and the Eurosystem became responsible for conducting a single monetary policy. Greece and Slovenia joined the EMU on January 1, 2001 and on January 1, 2007, respectively. Cyprus and Malta joined the EMU on January 1, 2008.

The European System of Central Banks (ESCB) consists of the European Central Bank (ECB), established on June 1, 1998 and the national central banks of the EU member states. The Eurosystem is formed by the 15 national central banks in the euro area and the ECB. So long as there are EU member states that have not yet adopted the euro (currently Bulgaria, the Czech Republic, Denmark, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Sweden and the United Kingdom), there will be a distinction between the 15-country Eurosystem and the 27-country ESCB. The twelve national central banks of non-participating countries do not take part in the decision-making of the single monetary policy, they maintain their own national currencies and conduct their own monetary policies. The Bank of Italy, as a member of the Eurosystem, participates in Eurosystem decision-making.

The Eurosystem is principally responsible for:

	•		defining and implementing the monetary policy of the euro area, including fixing rates on the main refinancing lending facility (regular liquidity-providing reverse transactions with a weekly frequency and a maturity of two weeks, executed by the national central banks on the basis of standard tenders), the marginal lending facility (overnight liquidity facility provided to members of the Eurosystem by the national central banks against eligible assets, usually with no credit limits or other restrictions on access to credit) and the deposit facility (overnight deposit facility with the national central banks available to members of the Eurosystem, usually with no deposit limits or other restrictions);

	•		conducting foreign exchange operations and holding and managing the official foreign reserves of the euro area countries;

	•		issuing banknotes in the euro area;

	•		promoting the smooth operation of payment systems; and

	•		cooperating in the supervision of credit institutions and the stability of the financial system.

The ESCB is governed by the decision-making bodies of the ECB which are:

	•		the Executive Board, composed of the President, Vice-President and four other members, responsible for implementing the monetary policy formulated by the Governing Council;

	•		the Governing Council, composed of the six members of the Executive Board and the governors of the 15 national central banks, in charge of implementing the tasks assigned to the Eurosystem and formulating the euro area’s monetary policy; and

	•		the General Council, composed of the President and the Vice-President of the ECB and the governors of the 27 national central banks of the EU member states. The General Council contributes to the advisory functions of the ECB and will remain in existence as long as there are EU member states that have not adopted the euro.

The ECB is independent of the national central banks and the Governments of the member states and has its own budget, independent of that of the European Community; its capital is not funded by the European Community but has been subscribed and paid up by the national central banks of the member states that have adopted the euro, pro-rated to the GDP and population of each such member state. The ECB has exclusive authority for the issuance of currency within the euro area. The ECB had paid up capital of approximately €4 billion at December 31, 2006, of which approximately €726.3 million, or 13 per cent, was subscribed by the Bank of Italy.

The Bank of Italy. The Bank of Italy, founded in 1893, is the lender of last resort for Italian banks and banker to the Treasury. It supervises and regulates the Italian banking industry and operates services for the banking industry as a whole. It also supervises and regulates non-bank financial intermediaries. The Bank of Italy had assets at December 31, 2006 of €221.8 billion.

The ECB’s Monetary Policy. The primary objective of the ESCB is to preserve the euro’s purchasing power and consequently to maintain price stability in the euro area. In October 1998 the Governing Council announced the ECB monetary strategy and provided a quantitative definition of price stability, which has been defined as an annual increase in the Harmonized Index of Consumer Prices for the euro area of below 2 per cent. Despite short-term volatility, price stability is to be maintained over the medium term. Moreover, in order to assess the outlook for price developments and the risks for future price stability, a two-pillar approach was adopted by the ECB.

The first pillar assigns a prominent role to money supply, the growth rate of which is measured through a broad monetary aggregate called M3. This monetary reference aggregate consists of currency in circulation, overnight deposits, deposits with an agreed maturity up to two years, deposits redeemable at a period of notice up to three months, repurchase agreements, debt securities of up to two years, money market fund shares and money market paper. In December 1998, the Governing Council set the first quantitative reference value for M3 growth, at an annual growth rate of 4.5 per cent. This reference value was confirmed by the Governing Council in 1999, 2000, 2001 and 2002. On May 8, 2003 the Governing Council decided to stop its practice of reviewing the reference value annually, given its long-term nature.

The second pillar consists of a broad assessment of the outlook for price developments and the risks to price stability in the euro area and is made in parallel with the analysis of M3 growth

in relation to its reference value. This assessment encompasses a wide range of financial market and other economic indicators, including macroeconomic projections. Based on a thorough analysis of the information provided by the two pillars of its strategy, the Governing Council determines monetary policy aiming at price stability over the medium term.

The ECB’s monetary and exchange rate policy is aimed at supporting general and economic policies in order to achieve the economic objectives of the EU, including sustainable growth and a high level of employment without prejudice to the objective of price stability.

ECB Interest Rates. As a result of the global economic slowdown in 2001 and the weakness of the economy in the euro area in 2002 and the first half of 2003, the Governing Council progressively lowered interest rates by a total of 275 basis points, with interest rates on minimum bid rate on main refinancing operations, marginal lending and deposit facilities reaching 2.00 per cent, 3.00 per cent and 1.00 per cent, respectively in June 2003. These rates remained unchanged until December 2005.

The euro area experienced sustained economic growth in 2006 and the first half of 2007. The Governing Council determined that given the euro area’s actual and expected monetary and credit growth, upside risks to price stability over the medium term prevailed. Accordingly, the Governing Council raised interest rates on several occasions during 2006 and the first half of 2007, with interest rates on minimum bid rate on main refinancing operations, marginal lending and deposit facilities progressively increasing by a total of 200 basis points over this period, reaching 4.00 per cent, 5.00 per cent and 3.00 per cent, respectively in June 2007.

The following table shows the movement in the interest rate on main refinancing operations and on marginal lending and deposit facilities from February 4, 2000 to June 13, 2007.


			Main Refinancing Operations
					Variable rate		Marginal lending
	Deposit Facility				tenders — minimum		facility
Effective Date	% interst rate		Fixed rate tenders		bid rate		% interest rate
2000
Feb 4		2.25		3.25				4.25
Mar 17		2.50		3.50				4.50
Apr 28		2.75		3.75				4.75
Jun 9		3.25		4.25				5.25
Jun 28		3.25				4.25		5.25
Sep 1		3.50				4.50		5.50
Oct 6		3.75				4.75		5.75
2001
May 11		3.50				4.50		5.50
Aug 31		3.25				4.25		5.25
Sep 18		2.75				3.75		4.75
Nov 9		2.25				3.25		4.25
2002
Dec 6		1.75				2.75		3.75
2003
Mar 7		1.50				2.50		3.50
June 6		1.00				2.00		3.00
2005
Dec 6		1.25				2.25		3.25
2006
Mar 8		1.50				2.50		3.50
June 15		1.75				2.75		3.75
August 9		2.00				3.00		4.00
October 11		2.25				3.25		4.25
December 13		2.50				3.50		4.50
2007
March 14		2.75				3.75		4.75
June 13		3.00				4.00		5.00


Source:		European Central Bank

ECB Money Supply and Credit. The three-month moving average of twelve-month euro money supply growth, or M3, a measure that is used to evaluate the divergence from the ECB’s 4.5 per cent reference growth rate, remained under the reference rate prior to May 2001 and since then has remained above the reference rate. It grew to 7.6 per cent through December 2001, declined slightly to 6.9 per cent through December 2002 and grew sharply in the first half of 2003 to over 8.0 per cent. The growth of M3 through the first half of 2003 was mainly due to shifts in portfolios to more liquid assets resulting from continued uncertainty in the financial markets, international political tensions and low long-term and short-term interest rates. In addition, the high growth rate of M3 was attributable to the introduction of the euro in physical form in the countries participating in the EMU on January 1, 2002 and to the decline in the

growth of total lending to the private sector, which decreased to a twelve month growth of 4.7 per cent in 2002, compared to 6.7 per cent in 2001.

M3 subsequently declined to 7.5 per cent through December 2003 and 6.6 per cent through December 2004. This slowdown was mainly attributable to the increased stability of the financial markets, with a resulting decrease in the proportion of liquid assets in investor portfolios and increasing investment in the equity markets and long-term debt investments. The effects of this trend were partially offset by higher investment in money market fund shares. The slowdown in M3 growth during this period was partially offset by a reduction in the spread between long and short term interest rates, which resulted in a growth in the proportion of short term deposits and repurchase agreements.

M3 grew to 7.4 per cent through December 2005, principally due to higher lending to the private sector, which grew by 9.2 per cent in 2005, and lending to the corporate sector, which grew by 8.3 per cent in 2005 reflecting higher investment by companies and growing demand for loans to support corporate operations such as mergers and acquisitions.

M3 grew to 9.8 per cent through December 2006, the highest rate since the launch of the common monetary policy. This growth was due mainly to higher lending to the private sector, which grew by 10.8 per cent in 2006, and lending to the corporate sector, which grew by 13 per cent during the same year. This steady growth was partially offset by a slowdown in lending to households, particularly mortgages, which increased by 8.2 per cent in 2006, compared to an increase of 11.5 per cent in 2005.

Exchange Rate Policy

Under the Maastricht Treaty, the ECB and ECOFIN are responsible for foreign exchange rate policy. The European Council formulates the general orientation of exchange rate policy, either on the recommendation of the Commission, following consultation with the ECB, or on the recommendation of the ECB. However, the Council’s general orientation cannot conflict with the ECB’s primary objective of maintaining price stability. The ECB has exclusive authority for effecting transactions in foreign exchange markets.

Banking Regulation

Regulatory Framework. Italian banks fall into one of the following categories:

	•		joint stock banks; or

	•		co-operative banks.

Pursuant to the principle of “home country control,” non-Italian EU banks may carry out banking activities and activities subject to “mutual recognition” in Italy within the framework set out by Directive No. 2006/48/EC and Directive No. 2006/49/EC. Under the principle of “home country control,” a non-Italian EU bank remains subject to the regulation of its home-country supervisory authorities. It may carry out in Italy those activities described in the aforesaid Directives that it is permitted to carry out in its home country, provided the Bank of Italy is

informed by the entity supervising the non-Italian EU bank. Subject to certain authorization requirements, also non-EU banks may carry out banking activities in Italy.

Deregulation and Rationalization of the Italian Banking Industry. Historically, the Italian banking industry was highly fragmented and characterized by high levels of State ownership and influence. During the 1980s, Italian banking and European Community authorities began a process of substantial deregulation. The principal components of this deregulation in Italy were the Amato Law, the Consolidated Banking Law, the Dini Directive, the Ciampi Law, certain fiscal changes and the implementation of EU Directives. The principal components of deregulation at the European level are set forth in EU Directives and provide for:

	•		the free movement of capital among member countries;

	•		the easing of restrictions on new branch openings;

	•		the range of domestic and international services that banks are able to offer throughout the European Union; and

	•		the elimination of limitations on annual lending volumes and loan maturities.

The effect of the aforesaid deregulation, in the context of the implementation of the EU Directives has been a significant increase in competition in the Italian banking industry in virtually all bank and bank-related services.

The Amato Law. The Amato Law was enacted in July 1990 to strengthen the capital base of the Italian banking system by creating incentives for consolidation, and permitting greater private investment. The restructuring process under the Amato Law was intended to create larger and more efficient institutions capable of providing better services and competing more effectively in Italy and abroad. The Amato Law contains two principal provisions:

	•		Banks organized as public law entities were allowed to convert into, or to transfer their assets to, one or more joint-stock companies. Banks were also permitted to be members of a holding company structure; and

	•		Consolidations were encouraged through tax incentives.

The Consolidated Banking Law. In 1993, the Consolidated Banking Law consolidated most Italian banking legislation into one statute. Provisions in the Consolidated Banking Law relate, inter alia, to the role of supervisory authorities, the definition of banking and related activities, the authorization of banking activities, the scope of banking supervision, special bankruptcy procedures for banks and the supervision of financial companies. Banking activities may be performed by banks, without any restriction as to the type of bank . Furthermore, subject to their respective by-laws and applicable regulations, banks may engage in all the business activities that are integral to banking as described in the EU Banking Directive.

The Dini Directive. Historically, a large number of Italian banks were owned by public law banking foundations, which in turn were controlled principally by local government authorities.

The Dini Directive, enacted in November 1994, provided tax incentives for Italian banking foundations to either:

	•		reduce to below 50 per cent their equity participation in certain public banks originally organized as foundations through either public offerings or sales to certain specified entities including, for example, banking groups, certain financial institutions and insurance companies, or

	•		cover more than 50 per cent of the foundations’ expenses from income derived from sources other than such banks.

The Ciampi Law. The Ciampi Law, enacted on December 23, 1998, and Legislative Decree No. 153 of May 17, 1999, collectively referred to herein as the Ciampi Law, provide for, inter alia, the:

	•		transformation of public law banking foundations into non-profit private institutions with the exclusive purpose of pursuing projects of social importance in the area of scientific research, education or healthcare;

	•		divestiture of any remaining controlling participation in banks or financial institutions by 2006; and

	•		application of the tax regime for non-profit private institutions (50 per cent reduction in income tax and regional tax on production activities (Imposta Regionale sulle Attività Produttive, or IRAP)) to those foundations that disposed of their controlling stakes in banks by May 2003.

The Draghi Law. The Draghi Law (Legislative Decree No. 58 of February 24, 1998) became effective in July 1998 and aimed at reorganizing laws governing the investment services, securities markets and publicly traded companies. While the Draghi Law did not significantly amend Italian legislation governing the banking industry, it is generally applicable to Italian publicly traded companies. In particular, the Draghi Law introduced a comprehensive framework for the provision of investment services and collective investments (which applies to investment firms, banks and asset managers) new provisions regulating tender offers of securities, savings shares, the solicitation of proxies and the duration of shareholder agreements, with the objective of protecting minority shareholders in general.

Directive 2004/39/EC — The Markets in Financial Instruments EU Directive (MiFID).

The MiFID came into force on 1 November 2007, replacing the existing Investment Services Directive (Directive 93/22/EEC). The purpose of the MiFID is to harmonize rules governing the operation of regulated markets. In Italy, its implementation has resulted in significant changes to the Draghi Law and Consob regulations. In addition, Consob and Banca d’Italia, will adopt a joint regulation coordinating their respective supervisory competences of the financial market and institutions operating in those markets.

The MiFID resulted in significant changes to the regulation of financial instruments and widened the range of investment services and activities that firms can offer in EU Member States other than their home state. In addition, the MiFID:

	•		provides for tailored disclosure requirements, depending on the level of sophistication of investors;

	•		establishes detailed standards for fair dealings and fair negotiations between investment firms and investors;

	•		introduces the operation of multilateral trading facilities (MTF) as a new “core” investment service; and

	•		extends the scope of the definition of financial instruments to include commodity derivatives, credit derivatives and swap agreements.

The MiFID also sets out detailed requirements governing the organization of investment firms and their conduct of business.

Supervision. Supervisory Authorities, in accordance with the Consolidated Banking Law, include the Inter-Ministerial Committee for Credit and Savings (Comitato Interministeriale per il Credito e il Risparmio, or CICR), the Ministry of Economy and Finance and the Bank of Italy. The principal objectives of supervision are to ensure the sound and prudent management of the institutions subject to supervision and the overall stability, efficiency and competitiveness of the financial system.

The CICR. The CICR is composed of the Economy and Finance Minister, who acts as chairman, and certain other economic ministers of the Italian government. The Governor of the Bank of Italy, although not a member of the CICR, attends all meetings of the CICR but does not have the right to vote at such meetings. Where provided for by the law, the CICR establishes general guidelines that the Bank of Italy must follow when adopting regulations applicable to supervised entities.

The Ministry of Economy and Finance. The Ministry has certain powers in relation to banking and financial activities. It sets eligibility standards to be met by holders of equity interests in the share-capital of a bank and the level of professional experience required of directors and executives of banks and other financial intermediaries. The Ministry may, in cases of urgency, adopt measures that are generally within the sphere of CICR’s powers and may also issue decrees that subject banks and other supervised entities to mandatory liquidation (liquidazione coatta amministrativa) or extraordinary management (amministrazione straordinaria), upon the proposal of the Bank of Italy.

The Bank of Italy. The Bank of Italy supervises banks and certain other intermediaries through its regulatory powers (in accordance with the guidelines issued by the CICR). The Consolidated Banking Law identifies four main areas of intervention subject to the regulatory power of the Bank of Italy: capital requirements, risk management, the taking of participations, administrative and accounting organization and internal controls and public disclosure requirements. The Bank of Italy also issues regulations in other fields, such as transparency in

banking and financial operations of banks and financial intermediaries. The Bank of Italy supervises banks and other supervised entities by, inter alia, authorizing the acquisition of shareholdings in banks in excess of certain thresholds and exercising off-site and on-site supervision. Certain acquisitions by non-EU entities based in jurisdictions that do not contemplate reciprocal rights by Italian banks to purchase banks based in those jurisdictions, may be denied by the President of the Council of Ministers, upon prior notice to the Bank of Italy.

On-site visits carried out by the Bank of Italy may be “general” or “special” (which are directed toward specific aspects of banking activity). Matters covered by an on-site visit include the accuracy of reported data, compliance with banking laws and regulations, organizational aspects and conformity with a bank’s own by-laws.

The Bank of Italy requires all banks to report periodic statistical information related to all components of their non-consolidated balance sheet and consolidated accounts. Other data reviewed by the Bank of Italy include minutes of meetings of each bank’s board of directors. Banks are also required to submit any other data or documentation that the Bank of Italy may request.

In addition to its supervisory role, the Bank of Italy — as the Italian Central Bank — performs monetary policy functions by participating in the European System of Central Banks, and acts as treasurer to the Italian Ministry of Economy and Finance. It also operates services for the banking industry as a whole, most notably the Credit Register (Centrale dei Rischi), a central information database on credit risk.

On December 28, 2005, a new law was introduced to modify the competences and organization of the Bank of Italy. In particular, while prior to the reform the Governor was appointed for an indefinite term, in accordance with the new legal framework, the Governor of the Bank of Italy is now appointed for a 6 year term, and may be reelected only once. In addition, the new law transferred most of the competences of the Bank of Italy regarding competition in the banking sector to the Antitrust Authority, although joint clearance of the Bank of Italy and the Antitrust Authority is required in case of mergers and acquisitions.

On February 2, 2007, the Government approved a draft law aimed at reforming the Italian regulatory authorities’ system. Pursuant to the bill, the authorities currently supervising the insurance and the pension funds sectors would be suppressed and their competences transferred, respectively, to the Bank of Italy and to Consob, the Italian Stock Exchange Commission. In addition, according to the draft law, the CICR would be replaced by a special committee for the financial stability, composed by representatives of Ministry of Economy and Finance.

Reserve Requirements. Pursuant to ECB, ESCB and EU regulations, each Italian bank must deposit with the Bank of Italy an interest-bearing reserve expressed as a percentage of its total overnight deposits, deposits with original maturities up to two years or redeemable upon prior demand up to two years and debt securities with original maturities up to two years. A bank’s reserve requirements are deemed satisfied if, during each one-month maintenance period, the average amount of the daily balances of the reserve accounts is not lower than the reserve due (the average reserve obligation). The compulsory reserves earn an annual rate of interest

determined by the average, over the monthly maintenance period, of the ESCB’s rate for its main refinancing operations. Failure to comply in full or in part with the reserve obligations may cause the ECB to apply sanctions on the noncompliant bank.

Risk-Based Capital Requirements and Solvency Ratios. Capital adequacy requirements are mainly regulated by Directives No. 2006/48/EC and No. 2006/49/EC or, together, the Capital Requirements Directive, the Consolidated Banking Law, CICR Regulation of December 27, 2006, and by the regulations issued by the Bank of Italy on the same date (Nuove disposizioni di vigilanza prudenziale per le banche). Italian banks are generally required to have ratios of regulatory capital to risk-weighted assets specified in the relevant regulations. At least half of the required regulatory capital must consist of Tier I capital (“core capital”), and the rest may consist of Tier II capital (“supplementary capital”). Core capital includes paid-in share capital, capital reserves, retained earning reserves and a special reserve denominated “fondo per rischi bancari generali” less own shares owned by the bank, goodwill, intangible assets and losses carried forward and incurred in the fiscal year. Supplementary capital includes asset revaluation reserves, subordinated debt and other quasi-equity instruments (such as non-redeemable loans). There are also limitations on the maximum amount of supplementary capital. To calculate risk-weighted assets, the aforesaid provisions have now implemented in Italy the framework commonly known as the “Basel II Accord.”

Loan Exposure Limitations. The purpose of the provisions of the EU Banking Directive on the monitoring and control of large exposures of credit institutions is to limit a bank’s exposure to any single borrower or group of related borrowers. In compliance with the criteria specified by the Ministry of Economy and Finance, the Bank of Italy has issued supervisory regulations on the concentration of risk that implement these provisions. These regulations require stand-alone banks or banking groups to limit their largest loans (i.e., loans exceeding 10 per cent of their regulatory capital) to any single customer or group of related customers to 25 per cent of a bank’s regulatory capital and the aggregate of large exposures to not more than 800 per cent of a bank’s regulatory capital. A more stringent limit (20 per cent of regulatory capital) applies to all persons or entities affiliated with the bank, which is defined to include (1) shareholders that, directly or indirectly, control, or own at least 15 per cent of the share capital in, the bank or the parent company of a banking group and (2) companies controlled by the bank or in which the bank owns at least 20 per cent of share capital, excluding subsidiaries which are included in the banking group or that are consolidated in accordance with the relevant criteria specified by the regulations.

Banks belonging to banking groups must, on an individual basis, limit their largest loan exposures to any single customer or group or related customers to 40 per cent of the bank’s regulatory capital.

Equity Participations by Banks. Prior approval of the Bank of Italy is required for any equity investments by a bank in other banks or financial or insurance companies: (1) exceeding 10 per cent of the consolidated regulatory capital of the acquiring bank; (2) exceeding 10 per cent or 20 per cent of the share capital of the bank or financial or insurance company being acquired; or (3) resulting in the control of the share capital of the bank or financial or insurance company being acquired. Investments by stand-alone banks or by banking groups into insurance companies exceeding in the aggregate 40 per cent of the acquiror stand-alone or consolidated

regulatory capital, as the case may be, (and 60 per cent of the regulatory capital, in case of the single bank included in the banking group) are not permitted.

The acquisition by banks and banking groups of shareholdings in non-financial companies is subject to certain limitations. Aggregate shareholdings in non-financial companies purchased by banks and banking groups must be lower than a certain pre-determined percentage of the acquiring bank’s regulatory capital. Moreover, banks and banking groups may only acquire up to a certain percentage shareholding in any single non-financial company and must diversify their investments in non-financial companies in order to avoid undue exposure to any single non-financial sector. Certain banks may be authorized to effect such investments in accordance with less stringent limitations, provided that they meet specific criteria set forth by the relevant regulations.

Finally, prior approval of the Bank of Italy is required for any acquisition by banks of control of companies that carry out activities instrumental to banking activities, such as bank information processing activities.

As a general limit, equity investment by banks and banking groups in all types of companies may not exceed in aggregate, together with real estate investments, 100 per cent of a bank’s “available margin,” calculated as the positive difference, if any, between the bank’s regulatory capital and the aggregate of the shareholdings and the real estate assets owned by it.

Deposit Insurance. The Interbank Fund (Fondo Interbancario di Tutela dei Depositi) was established in 1987 by a group consisting of the principal Italian banks to protect depositors against the risk of bank insolvency and the loss of deposited funds. The Interbank Fund assists banks that are declared insolvent or are subject to temporary financial difficulties.

Participation to the Interbank Fund is compulsory for all Italian banks and intervenes when a bank is either in administrative management or mandatory liquidation. In the event of administrative management, the Interbank Fund may make payments to support the business of the bank, which may take the form of debt financing or taking an equity stake in the bank. In the case of mandatory liquidation, the Interbank Fund guarantees the refund of deposits to banking customers up to a maximum of €103.3 thousand per depositor per bank. The guarantee does not cover the following: customer deposit instruments in bearer form, deposits by financial and insurance companies and by collective investment vehicles and deposits by bank managers and executives with the bank that employs them.

Structure of the Banking Industry. Italy had 793 banks at December 31, 2006, compared to 841 at December 31, 2000. Banks ultimately controlled by local public authorities accounted for a substantial portion of total bank assets in 2006. In 2006, joint stock banks accounted for approximately 78.3 per cent of total bank assets and for 77.4 per cent of domestic customer deposits. Cooperative banks collectively represented 14.9 per cent of total bank assets and held 20.0 per cent of such deposits. Italian branches of foreign banks accounted for 6.8 per cent of total bank assets and for 2.6 per cent of deposits.

The ownership structure of the banking sector has undergone substantial change since 1992, reflecting significant privatizations through 1998. See “Public Finance — Privatization Program.”

In addition, since 1999 the Italian banking sector has experienced significant consolidation, which has resulted in the formation of relatively large banking groups such as Intesa Sanpaolo and UniCredit. Nevertheless, the principal Italian banking groups remain small in terms of size relative to their competitors in the other large economies in the euro area. As a result, the Italian banking sector consolidation may continue through combinations among Italian financial institutions as well as with non-Italian financial institutions. In 2005, Dutch bank ABN Amro acquired Banca Antonveneta, which was the first successful takeover of a listed Italian bank by a non-Italian bank. In 2006, French bank BNP Paribas acquired Banca Nazionale del Lavoro, the sixth largest Italian bank by deposits at the time of the acquisition. In 2007, Capitalia merged into Unicredito, creating one of the largest financial services organizations in Europe.

The European Union single market for financial services has and is expected to continue to affect the Italian banking system. Between 1980 and 2006, the number of foreign banks with branches in Italy grew from 26 to 74. These foreign banks principally specialize in wholesale corporate and interbank operations as well as retail banking, and few have branch networks.

Nevertheless, Italian banks have two competitive disadvantages relative to banks in other European Union countries. First, their operating costs are relatively high, principally as a result of high labor costs. Second, the contribution of services to net income is relatively low because Italian banks have not specialized in services to the same extent as banks in other countries. Many Italian banks are now seeking to increase their non-interest income as a proportion of total income by increasing the range of managed services offered.

Capitalization. According to the Bank of Italy, Italian banks are adequately capitalized. The ratio of total capital to risk-adjusted assets (the risk-asset ratio) as defined by the Basle Accord of 1988 was 10.7 per cent in 2005, compared to 10.6 per cent in 2005.

Bad Debts. Bad debts increased by 30.7 per cent in 2006 to €59,361 million after decreasing 16.4 per cent in 2005. As a percentage of total loans, bad debts decreased from 3.4 per cent in 2005 to 3.1 per cent in 2006.

Credit Allocation

The Italian credit system has changed substantially during the past decade. Banking institutions have faced increased competition from other forms of intermediation, principally securities markets. Lending activity growth increased by 11.5 per cent in 2006, almost three percentage points more than in the previous year. The growth in Italian lending activity was attributable to medium- and long-term lending activity, which grew 11.6 per cent in 2006, compared to 13.0 per cent in 2005 and to short-term lending activity, which increased 10.5 per cent in 2006, compared to 2.0 per cent in 2005. The growth rate in lending activity to companies increased to 11.8 per cent in 2006, compared to 6.3 per cent in 2005, due principally to a 6.5 per cent increase in lending activities in the manufacturing sector, compared to a 2.2 per cent increase in 2005, to the growth of lending activities in the construction sector, from 13.1 per cent

THE EXTERNAL SECTOR OF THE ECONOMY

Foreign Trade

Italy is fully integrated into the European and world economies, with imports and exports in 2006 equal to 26.7 per cent and 26.9 per cent of real GDP, respectively. During 2003, Italy recorded a lower trade surplus than in 2002, and from 2004 it recorded a trade deficit which in subsequent years increased due to higher increases in imports than exports. In particular, Italy’s merchandise exports have suffered from competition with Asian products, reflecting higher prices of Italian products, the improving quality of non-Italian products and the increased commercial presence and improved services offered by non-Italian companies in EU countries. Moreover, Italy’s specialization in more traditional merchandise is unable to meet the increased demand for high-technology products characterizing the expansion of world trade. Italy’s trade surplus declined from €7.8 billion, or 0.6 per cent GDP, in 2002 to €1.6 billion, or 0.1 per cent of GDP, in 2003. Notwithstanding the expansion of world trade, Italy registered a trade deficit of €1.2 billion in 2004, of €9.4 billion in 2005 and of €19.8 billion in 2006, reflecting the gradual decline in competitiveness of Italian products and a strengthening of the euro in relation to other currencies.

The following table illustrates Italy’s exports and imports for the periods indicated. Export amounts do not include insurance and freight costs and only include the costs associated with delivering and loading the goods for delivery. This is frequently referred to as “free on board” or “fob.” Import amounts include all costs, insurance and freight, frequently referred to as “charged in full” or “cif.”

Foreign Trade


	2002		2003		2004			2005			2006
			(Millions of euro)
Exports (fob)
Agriculture, forestry and fishing		4,171		4,144		3,805			4,130			4,374
Extractive industries		683		687		776			1,003			1,092
Manufactured products		261,520		254,541		273,846			288,253			319,549
Food, beverage and tobacco products		15,010		14,904		15,689			16,497			17,870
Textiles, leather products and clothing		41,207		38,945		39,053			38,857			41,143
Wood and wood products		1,471		1,326		1,381			1,364			1,500
Paper, printing and publishing		6,156		6,017		6,203			6,399			6,745
Refined oil products		4,454		5,371		6,282			9,772			10,866
Chemical and pharmaceutical products		26,906		26,059		27,442			30,278			32,964
Rubber and plastic products		9,853		9,845		10,698			11,207			12,152
Non-metallic minerals and mineral products		9,232		8,711		9,042			8,874			9,553
Metals and metal products		21,627		21,894		27,387			30,195			37,960
Mechanic products and machinery		53,126		53,326		57,801			59,690			66,906
Electric and precision machinery		25,007		23,761		25,872			27,571			30,092
Transport equipment		30,520		29,169		31,734			32,433			35,748
Other manufactured products		16,951		15,214		15,262			15,118			16,051
Energy, gas and water production		35		20		58			63			153
Other		2,654		5,224		5,929			6,475			6,039

Total exports		269,064		264,615		284,412			299,923			331,206

Imports (cif)
Agriculture, forestry and fishing		9,047		9,292		9,272			9,321			9,730
Extractive industries		26,282		27,457		31,611			43,693			55,303
Manufactured products		220,441		218,090		235,869			247,228			276,744
Food, beverage and tobacco products		18,450		18,671		19,594			20,569			22,082
Textiles, leather products and clothing		20,266		20,082		20,683			21,849			24,754
Wood and wood products		3,356		3,390		3,507			3,578			3,985
Paper, printing and publishing		6,556		6,271		6,375			6,664			6,958
Refined oil products		5,045		4,735		4,747			5,593			6,912
Chemical and pharmaceutical products		35,279		35,824		38,664			41,142			44,905
Rubber and plastic products		5,509		5,566		6,022			6,353			6,930
Non-metallic minerals and mineral products		2,956		2,881		3,033			3,182			3,384
Metals and metal products		24,288		24,039		29,706			31,938			43,363
Mechanic products and machinery		20,720		19,902		21,180			21,690			23,651
Electric and precision machinery		34,748		33,600		37,397			38,389			40,313
Transport equipment		39,129		38,935		40,303			41,149			43,809
Other manufactured products		4,140		4,193		4,658			5,133			5,696
Energy, gas and water production		1,879		1,796		1,797			2,175			2,158
Other		3,577		6,363		7,084			6,875			7,101

Total imports		261,226		262,997		285,633			309,292			351,034

Trade balance		7,838		1,618		(1,221	)		(9,369	)		(19,828	)


Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

The Italian economy relies heavily on foreign sources for energy and other natural resources, and Italy is a net importer of chemical and pharmaceutical products, agricultural and food industry products, paper, printing and publishing products, wood and wood products, minerals, metals and metal products, electric and precision machinery and transport equipment.

Of all the major European countries, Italy is one of the most heavily dependent on import of energy, importing 87.1 per cent of its energy requirements in 2006 and 85.8 per cent in 2005. As a result, Italy’s trade balance is vulnerable to fluctuations in oil prices.

Following a recovery in exports registered in 2004, growth slowed down to 0.3 per cent in 2005. This was followed in 2006 by an increase of 5.3 per cent, the largest increase in exports registered since 2000, due primarily to a growth in the volume of exports of mechanical machinery and equipment, electrical equipment and precision instruments, metal products and transport equipment. The growth in the volume of exports in 2006 was principally attributable to an increase in exports to EU countries, particularly Germany and France, Italy’s largest trading partners. During the same period, exports to the ten EU member states that joined the EU in May 2004 increased by 10.0 per cent and exports to China and Russia increased by 10.3 per cent and 17.7 per cent, respectively.

According to the Bank of Italy, during 2006, in connection with a strong expansion of world demand and the appreciation of the euro by more than 1 per cent in real terms, Italy’s share of the world economy declined further at both current and constant prices. According to preliminary data analyzed by the Bank of Italy, Italy’s share fell from 3.7 per cent in 2005 to 3.5 per cent in 2006 at current prices and exchange rates, and from 2.7 in 2005 to 2.5 per cent in 2006 at constant 1995 prices and exchange rates.

Imports of goods increased by 4.3 per cent at constant prices in 2006, compared to a 0.5 per cent increase in 2005. This increase was principally due to a recovery in domestic demand and was driven by increases in imports of manufactured products, which grew by 11.9 per cent, and products and services related to extractive industries, which increased by 26.6 per cent. In particular, the increase in imports of manufactured products was characterized by a significant increase in imports of metals and metal, chemical and pharmaceutical products. Imports from China, which became Italy’s principal non-EU supplier in 2004, increased by 15.1 per cent in 2006.

Geographic Distribution of Trade

As a member of the European Union, Italy enjoys free access to the markets of the other EU member states and applies the external tariff common to all European Union countries. During the past several years, the European Union countries have made significant progress in reducing non-tariff barriers, such as technical standards and other administrative barriers, to trade amongst themselves, and Italy has incorporated into national law most of the European Union directives on trade and other matters. With the accession of ten new members in 2004, and two new

members in 2007, the EU has come to encompass many of Italy’s most important central and eastern European trading partners. The following tables show the distribution of Italy’s trade for the periods indicated.

Distribution of Trade (cif-fob) — Exports


Exports (fob)	2002		2003		2004		2005		2006
			(Millions of euro)
Belgium-Luxembourg		8,710		7,609		7,754		8,604		9,972
France		33,069		33,033		35,230		36,845		38,211
Germany		37,256		37,233		38,761		39,493		42,964
Netherlands		6,960		6,387		6,701		7,274		7,800
United Kingdom		18,780		18,686		20,153		19,703		19,758
Ireland		1,464		1,391		1,389		1,452		1,687
Denmark		2,090		1,972		2,147		2,626		2,574
Greece		5,721		5,832		6,486		6,030		6,507
Spain		17,354		18,911		20,727		22,466		23,631
Portugal		3,384		3,303		3,419		3,316		3,601
Austria		6,004		6,199		6,988		7,422		7,996
Finland		1,424		1,311		1,438		1,546		1,588
Sweden		2,600		2,680		2,847		3,077		3,495

Total EU (excluding EU members that joined in 2004 and 2007)		144,814		144,547		154,040		159,854		169,784
EU members that joined in 2004⁽¹⁾		14,542		15,600		16,462		17,796		20,451

Total EU (excluding EU members that joined in 2007)⁽²⁾		159,356		160,147		170,502		177,650		190,235
Turkey		N.A.		4,721		5,687		6,167		6,780
United States		25,802		21,970		22,368		23,960		24,678
Russia		N.A.		3,847		4,963		6,075		7,639
OPEC countries		10,937		10,201		11,028		12,126		14,335
Japan		4,495		4,333		4,333		4,537		4,483
China		4,017		3,850		4,448		4,603		5,703
Other Asia		N.A.		8,596		8,979		9,085		9,789
Other		N.A.		46,951		52,105		55,720		63,350

Total		269,064		264,616		284,413		299,923		326,992


(1)		Comprises the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, Slovenia, Cyprus and Malta, which joined the EU in May 2004.

(2)		Bulgaria and Romania joined the EU in January 2007.

Source: ISTAT.

Distribution of Trade (cif-fob) — Imports


Imports (cif)	2002		2003		2004		2005		2006
			(Millions of euro)
Belgium-Luxembourg		12,283		12,374		13,880		15,077		15,776
France		29,895		29,951		31,278		30,849		31,913
Germany		46,837		47,521		51,319		53,646		58,133
Netherlands		15,433		15,362		16,862		17,483		19,316
United Kingdom		13,390		12,708		12,294		12,477		12,333
Ireland		3,635		4,082		4,185		4,076		3,750
Denmark		1,821		1,925		2,109		2,242		2,299
Greece		1,269		1,463		1,503		1,550		1,799
Spain		12,102		12,729		13,317		13,158		14,336
Portugal		1,389		1,321		1,333		1,383		1,538
Austria		7,216		7,545		7,803		7,790		8,659
Finland		1,667		1,813		1,552		1,812		2,258
Sweden		3,528		3,542		3,833		3,701		3,949

Total EU (excluding EU members that joined in 2004 and 2007)		150,464		152,336		161,268		165,244		176,059
EU members that joined in 2004⁽¹⁾		8,906		9,226		11,184		13,300		16,504

Total EU (excluding EU members that joined in 2007)⁽²⁾		159,370		161,562		172,452		178,544		192,563
Turkey		N.A.		3,335		3,971		4,364		5,433
United States		12,548		10,272		9,991		10,719		10,764
Russia		N.A.		8,230		9,716		11,704		13,592
OPEC countries		15,822		16,792		19,339		27,291		33,954
Japan		5,321		5,281		5,520		4,977		5,452
China		8,307		9,553		11,828		14,135		17,962
Other Asia		N.A.		6,395		7,427		8,212		8,640
Other		N.A.		41,578		45,390		49,346		59,988

Total		261,226		262,998		285,634		309,292		348,348


(1)		Comprises the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, Slovenia, Cyprus and Malta, which joined the EU in May 2004.

(2)		Bulgaria and Romania joined the EU in January 2007.

Source: ISTAT.

As in the previous year, during 2006 over half of Italian trade was with other European Union members, with approximately 58.7 per cent of Italian exports and 55.6 per cent of imports attributable to trade with European Union partners (other than Bulgaria and Romania, which joined the EU in January 2007). However, Italian trade with non-EU countries has grown faster than trade with EU countries. Germany is Italy’s single most important trading partner and in 2006 supplied 16.8 per cent of Italian imports and purchased 13.3 per cent of Italian exports.

Since 2002, Italy has recorded a negative trade balance with other EU countries (including the ten member states that joined the EU in 2004, but excluding Bulgaria and Romania, which joined the EU in January 2007). Italy’s trade deficit with EU countries was €2.3 billion in 2006, compared to €0.9 billion in 2005. This increase was driven by the significant increase in the trade deficit with the Netherlands and Germany, which was only partially offset by the increase in trade surplus with other EU countries.

During 2006, Italy also recorded an increase in its trade deficit with non-EU countries, which grew from €8.5 billion in 2005 to €19 billion in 2006. This result reflected a significant increase in the deficits with oil-producers such as the OPEC countries and Russia (from €15.2 billion and €5.6 billion in 2005 to €19.6 billion and €6.0 billion in 2006, respectively), an increase in the deficit with China (from €9.5 billion in 2005 to €12.3 billion in 2006) offset in part by an increase in the trade surplus with the United States (from €13.2 billion in 2005 to €13.9 billion in 2006). In particular, the increase in the trade deficit with OPEC countries was driven by a sharp increase in the price of crude oil (average of the prices for the three main grades), which rose by 20 per cent on average, from $53.4 a barrel in 2005 to $64.3 in 2006.

Balance of Payments

The balance of payments tabulates the credit and debit transactions of a country with foreign countries and international institutions for a specific period. Transactions are divided into three broad groups: current account, capital account and financial account. The current account is made up of: (1) trade in goods (visible trade) and (2) invisible trade, which consists of trade in services, income from profits and interest earned on overseas assets, net of those paid abroad, and net capital transfers to international institutions, principally the European Union. The capital account primarily comprises net capital transfers from international institutions, principally the European Union. The financial account is made up of items such as the inward and outward flow of money for direct investment, investment in debt and equity portfolios, international grants and loans and changes in the official reserves.

The following table illustrates Italy’s balance of payments for the periods indicated.

Balance of Payments


	Year Ended December 31,
	2002			2003			2004			2005			2006
				(Millions of euro)
Current Account		(10,014	)		(17,351	)		(13,057	)		(23,403	)		(37,869	)
Goods		14,049			9,922			8,854			536			(9,532	)
Exports		267,582			263,599			283,347			299,402			331,930
Imports		253,533			253,677			274,493			298,866			341,462
Services		(3,043	)		(2,362	)		1,179			(523	)		(1,474	)
Exports		63,760			63,420			68,204			71,887			78,420
Imports		66,803			65,781			67,025			72,410			79,894
Income		(15,396	)		(17,811	)		(14,817	)		(13,643	)		(13,607	)
Inflows		45,782			43,097			42,748			49,488			57,480
Outflows		61,178			60,908			57,564			63,131			71,087
Transfers		(5,624	)		(7,101	)		(8,273	)		(9,773	)		(13,256	)
EU Institutions		(5,727	)		(6,289	)		(6,537	)		(8,143	)		(8,304	)
Capital Account		(67	)		2,251			1,700			998			1,891
Intangible assets		(206	)		(86	)		(38	)		69			(100	)
Transfers		139			2,337			1,738			929			1,991
EU Institutions		1,626			3,635			2,814			3,397			3,847
Financial Account		8,532			17,319			9,025			20,773			35,526
Direct investment		(2,739	)		6,507			(1,970	)		(17,555	)		(2,296	)
Abroad		(18,194	)		(8,037	)		(15,512	)		(33,575	)		(33,475	)
In Italy		15,455			14,544			13,542			16,020			31,179
Portfolio investment		16,107			3,369			26,449			43,398			54,829
Assets		(16,968	)		(51,068	)		(21,064	)		(87,025	)		(39,656	)
Liabilities		33,075			54,437			47,513			130,423			94,485
Financial Derivatives		(2,710	)		(4,827	)		1,834			2,332			(416	)
Other investment		985			13,676			(19,550	)		(8,212	)		(17,034	)
Change in official reserves		(3,111	)		(1,406	)		2,262			810			443
Errors and omissions		1,549			(2,218	)		2,332			1,632			452


Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

Current Account

Italy had a current account surplus in each year from 1992 to 1999. Following decreases in the current account surplus from 1997 to 1999, Italy has registered a current account deficit since 2000. This was due to a deterioration in Italy’s visible and invisible trade balance. During 2005 and 2006, Italy’s current account deficit increased sharply mainly as a result of the significant increase in prices of energy products. In particular, in 2006 the deficit rose to €37.9 billion (2.6 per cent of GDP) from € 23.4 billion (1.6 per cent of GDP) in 2005.

Visible Trade. Italy’s visible trade surplus (on a fob-fob basis) has had a steadily declining trend since 2001. In 2006, Italy’s visible trade balance registered a deficit of €9.5 billion or 0.6 per cent of GDP. This was mainly due to a significant increase in imports (14.3 per cent), which was only partially offset by an increase in exports. The increase in imports was driven by the rise in the price of energy products. Italy’s merchandise exports rose by 10.9 per cent in 2006, reflecting an increase in export volumes and prices. Italy’s visible trade deficit with China, the OPEC countries and Russia significantly increased in 2006, due principally to increases in prices of oil, textiles,

metals and machinery. Italy’s visible trade surplus with EU countries was equal to €1.3 billion in 2006, recording a slight decrease compared to 2005.

Invisible trade. In 2006, the balance on services deteriorated recording a deficit of €1.5 billion, compared to €0.5 billion in 2005. This result was mainly attributable to an increase in the deficit on technical and professional services, trade-related services and operating leasing, which grew from €2.1 billion in 2005 to €4 billion in 2006, and the increase in deficit on transport from €5.2 billion in 2005 to €5.5 billion in 2006. The effect of these increases was only partially offset by an increase in surplus on travel, which grew from €10.5 billion in 2005 to € 12 billion in 2006, due to an increase in spending by Italians abroad and significantly higher spending by foreigners in Italy. In particular, spending by Italians abroad increased by 9.7 per cent in 2006, compared to a 9.0 per cent decrease in 2005, and spending by foreigners in Italy grew by 13.5 per cent in 2006, compared to a 0.7 per cent increase in 2005.

Income. Italy’s income deficit remained unchanged at €13.6 billion in 2006. This result was mainly attributable to the decrease of income deficit from portfolio investment, from €9.1 billion in 2005 to €5.6 billion in 2006, and the positive balance on income from direct investment of €0.7 billion in 2006, compared to a negative balance in 2005. These results were offset by the increase in deficit on other investment income, which grew from €3.3 billion to €8.4 billion.

Current Transfers. Italy’s deficit on current account transfers increased to €13.3 billion in 2006 from €9.8 billion in 2005, reflecting an increase in the deficit on private transfers. The deficit on public transfers decreased from €8.3 billion in 2005 to €8 billion in 2006, notwithstanding the increase registered in the deficit with EU Institutions (from €8.1 billion in 2005 to €8.3 billion in 2006).

Capital Account

The surplus on Italy’s capital account, which accounts for transactions in intangible assets, increased from €1.0 billion in 2005 to €1.9 billion in 2006, principally as a result of higher credits from international organizations, including EU institutions.

Financial Account and the Net External Position

In 2006, the financial account surplus increased to €35.5 billion, from €20.8 billion in 2005, mainly as a result of the increase in portfolio investment surplus, which grew from €43.4 billion in 2005 to €54.8 billion in 2006, and the decrease in deficit on direct investments from €17.6 billion in 2005 to €2.3 billion 2006, the effects of which were partially offset by the increase in deficit on “other investments” from €8.2 billion in 2005 to €17.0 billion in 2006.

Italy’s net external debt position deteriorated from a €52.1 billion deficit, or 3.7 per cent of GDP, in 2005 to a €72.5 billion deficit, or 4.9 per cent of GDP, registered in 2006. This was mainly attributable to positive adjustments of €15.1 billion in exchange rates and in the value of securities (particularly equity securities), which offset an increase in net outflows recorded on the financial account.

Direct Investment. In 2006, Italy’s net direct investment outflows decreased to €2.3 billion, from €17.6 billion in 2005, due to a sharp rise in net inflows. The decrease in deficit on direct investment was mainly due to the increase of foreign investment in Italy, which almost doubled, from €16 billion in 2005 to €31.2 billion in 2006, while Italian investment abroad remained substantially unchanged at €33.5 billion in 2006. The substantial net direct investment inflows and outflows recorded in 2006 were almost entirely due to the high number of acquisitions of equity interests and merger transactions concluded during the same year.

Foreign direct investment in Italy, net of divestment, remained substantially stable at low levels during the 1990s, recording an average of 0.4 per cent of GDP for the years 1990-1999 and a peak of €16.6 billion or 1.4 per cent of GDP in 2001. After four years of steady decrease, foreign direct investment in Italy, net of divestments, grew by €2.5 billion, from €13.5 billion in 2004, to €16.0 billion in 2005, primarily due to higher investment in the Italian industrial and energy sectors. In 2006, foreign direct investment almost doubled in Italy, reaching €31.2 billion. This increase was principally due to the investments made by other EU countries, especially France and the Netherlands, in the banking sector, insurance services, production of machinery and equipment and transport and communication services.

Italian investment abroad, net of divestment, remained substantially unchanged in 2006 compared to 2005, at €33.5 billion. The high volumes registered in 2005 and 2006 are principally due to Italian investment in the banking sector, credit and insurance services and production of machinery.

The following table shows total direct investment abroad by Italian entities and total direct investment in Italy by foreign entities as of the dates indicated.

Direct Investment by Country⁽¹⁾


	2002		2030		2004		2005		2006
	(Millions of euro)
Direct investment abroad
Netherlands		30,740		38,716		47,198		55,124		68,175
Luxembourg		23,211		17,383		19,667		21,306		17,178
United States		16,660		14,718		14,063		16,616		19,824
United Kingdom		17,929		16,196		18,022		19,157		18,859
France		15,454		16,716		18,161		20,215		22,447
Switzerland		8,930		8,753		7,877		8,476		8,661
Germany		8,883		10,439		11,756		12,709		13,758
Spain		6,826		7,887		8,118		8,357		9,374
Brazil		2,382		2,775		2,950		4,180		4,285
Belgium		3,228		3,651		3,960		4,188		4,747
Argentina		1,565		1,700		1,625		1,873		1,752
Sweden		575		598		646		756		825
Other		26,163		27,168		28,287		33,696		42,324

Total		162,546		166,700		182,330		206,653		232,209


Direct Investment in Italy
Netherlands		16,712		21,479		29,101		33,947		41,217
Luxembourg		12,618		14,665		16,663		20,364		21,185
United States		14,728		15,547		16,740		18,169		19,602
United Kingdom		14,075		17,791		19,854		21,543		23,120
France		16,354		17,014		18,358		21,715		28,114
Switzerland		14,730		14,767		16,317		17,038		17,796
Germany		9,541		11,024		10,677		12,967		8,549
Spain		897		1,022		1,448		4,083		8,929
Brazil		56		63		96		156		243
Belgium		2,211		2,368		2,488		1,679		1,786
Argentina		124		132		192		209		219
Sweden		2,329		2,371		2,493		2,570		2,682
Other		11,765		13,445		15,056		16,077		18,117

Total		116,140		131,688		149,483		170,517		191,559


(1)		Do not include real estate investment, investments made by Italian banks abroad and investments made by foreign entities in Italian banks.

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

Portfolio Investment. Portfolio investment rose to a net surplus of €54.4 billion in 2006 from €45.7 billion in 2005. This increase was mainly the result of a reduction in portfolio outflows from €87 billion to €39.7 billion, the effect of which was partially offset by a reduction in inflows from €130.4 billion in 2005 to €94.5 billion in 2006. The decline mainly involved debt securities.

During 2006, net foreign portfolio investment by Italians decreased to €38.1 billion, mainly as a result of lower investment in foreign debt securities, which decreased from €67.0 billion in 2005 to €20.3 billion in 2006, while net investment in Italian securities by foreign investors decreased from €79.3 billion to €48.1 billion, mainly due to lower investment

in Italian debt securities, particularly public debt securities, which decreased from €90.7 billion in 2005 to €36.7 billion in 2006.

Other Investment and Official Reserves. In 2006, Italy recorded an increase in the deficit on “other investment”. Transactions during the year reduced the official reserves by €0.4 billion in 2006, but the year-end stock rose from €55.9 billion to €57.5 billion, due to value adjustments. The €3.8 billion revaluation gain on gold reserves, which grew from €34.3 billion to €38.1 billion, more than offset the effect of the losses attributable to exchange rate adjustments reflecting the appreciation of the euro against the main reserve currencies (the dollar, yen and Swiss franc).

Errors and Omissions. The amount recorded in the residual “Errors and Omissions” account is a common area of concern for all leading countries in the European Union. The Government believes that this account is largely the result of exporters not reporting payments by non-residents to accounts abroad. Errors and omissions amounted to a positive €0.5 billion in 2006, compared to a positive €1.6 billion in 2005.

Reserves and Exchange Rates

When on January 1, 1999, eleven European countries, including Italy, adopted the euro as their new national currency, the conversion rate between the lira and the euro was irrevocably fixed at Lit. 1,936.27 per euro. The euro was introduced as a physical currency on January 1, 2002. On February 28, 2002, the lira ceased to be legal tender in Italy and was withdrawn from the financial system.

The following table sets forth, for the periods indicated, certain information regarding the US Dollar/Euro reference rate, as reported by the European Central Bank, expressed in U.S. dollar per euro.

US Dollar/Euro Exchange Rate


			Yearly Average
Period	Period End		Rate⁽¹⁾		High		Low
			(U.S.$ per €1.00)
1999		1.0046		1.0588		1.1790		1.0015
2000		0.9305		0.9194		1.0388		0.8252
2001		0.8813		0.8917		0.9545		0.8384
2002		1.0487		0.9511		1.0487		0.8578
2003		1.2630		1.1418		1.2630		1.0377
2004		1.3621		1.2462		1.3633		1.1802
2005		1.1797		1.2490		1.3077		1.1667
2006		1.317		1.2630		1.3331		1.1826
2007		1.4721		1.3797		1.4874		1.2893


(1)		Average of the reference rates for the last business day of each month in the period.

Source: European Central Bank.

PUBLIC FINANCE

The Budget Process

The Government’s fiscal year is the calendar year. The budget process begins in March of each year, when the General Accounting Office (Ragioneria Generale dello Stato), a department of the Ministry of Economy and Finance, sends a directive to each Ministry and Government agency to prepare a detailed budget for the next fiscal year and a summary forecast budget for the next three years. Other public sector entities also report to the Ministry of Economy and Finance in March on their cash resources and needs for the following fiscal year.

In June or July of each year the Ministry of Economy and Finance presents to Parliament a planning document called the Documento di Programmazione Economica e Finanziaria (Economic and Financial Program Document, or “Program Document”). The Program Document sets forth Government programs, reforms and public finance targets for the next four to five years. It describes the macroeconomic framework of the current year and sets forth two sets of forecast general government revenues and expenditures. The first forecast assumes no change from current policy and the second assumes the adoption of the programs contemplated by the Program Document. The Program Document is usually approved by Parliament by mid-August of each year.

By September 30 of each year the Ministry of Economy and Finance presents to Parliament its revisions, if any, to the Program Document, and the Relazione Previsionale e Programmatica (Forecast and Planning Report, or “RPP”) a document that shows programs, reforms and public finance targets for the next calendar year.

In the fourth quarter of each year the Government presents to Parliament its final budgetary package, which consists of the Legge di Bilancio (Budget Law) and the Legge Finanziaria (Annual Financial Law). The Budget Law formally authorizes general government revenues and expenditures for the upcoming calendar year. General government entities may not make payments unless they are provided for in the Budget Law. The Annual Financial Law sets forth the financial framework for the upcoming calendar year within the parameters set by the Program Document. It allocates financial resources to general government entities and amends laws in order to reflect these allocations.

The Ministry of Economy and Finance and, in particular, the General Accounting Office, is responsible for the management of Government expenditures. The Ministry of Economy and Finance submits to the Government and to Parliament a quarterly cash-flow report (Relazione Trimestrale di Cassa) that indicates year-to-date revenues and expenditures and divergence from the budget. If this divergence is significant, the Government may submit a supplemental budget to Parliament that, if approved, amends the Annual Financial Law for the then-current fiscal year.

European Economic and Monetary Union

Under the terms of the Maastricht Treaty, member states participating in the EMU, or Participating States, are required to avoid excessive government deficits. In particular, they are required to maintain:

	•		a budget deficit, or net borrowing, that does not exceed three per cent of GDP, unless the excess is exceptional and temporary and the actual deficit remains close to the three per cent ceiling. The Commission and the Council may consider an excess budget deficit resulting from a severe economic downturn to be exceptional if the excess results from a decrease in annual GDP or from an accumulated loss of output during a protracted period of very low annual GDP growth relative to its potential, taking into account all relevant factors including cyclical conditions, social and investment policies, fiscal consolidation efforts in “good times,” debt sustainability, public investment, the overall quality of public finances and the implementation of structural pension reforms (and their cost); and

	•		a gross accumulated public debt that does not exceed 60 per cent of GDP or is declining at a satisfactory pace toward this reference value.

Although Italy’s public debt exceeded 60 per cent of GDP in 1998, Italy was included in the first group of countries to join the EMU on January 1, 1999 on the basis that public debt was declining at a satisfactory pace toward the 60 per cent reference value.

In order to ensure the ongoing convergence of the economies participating in the EMU, to consolidate the single market and maintain price stability, effective on July 1, 1998, the Participating States agreed to a Stability and Growth Pact (SGP). The SGP is an agreement among the Participating States aimed at clarifying the Maastricht Treaty’s provisions for an excessive deficit procedure and strengthening the surveillance and co-ordination of economic policies. The SGP also calls on Participating States to target budgetary positions aimed at a balance or surplus in order to adjust for potential adverse fluctuations, while keeping the overall budget deficit below a reference value of 3 per cent of GDP.

Under SGP regulations, Participating States are required to submit a stability and growth program (each such program a “Stability and Growth Program”), and non-participating member states are required to submit revised convergence programs every year. These programs, which cover a three to four-year period, are required to set forth:

	•		projections for a medium-term budgetary objective (a country-specific target which, for Participating States having adopted the euro, must fall within one per cent of GDP and balance or surplus, net of one-off and temporary measures), and the adjustment path towards this objective;

	•		the main assumptions about expected economic developments and the variables (and related assumptions) that are relevant to the realization of the stability program such as government investment expenditure, real GDP growth, employment and inflation;

	•		the budgetary strategy and other economic policy measures to achieve the medium-term budgetary objective comprising detailed cost-benefit analysis of major structural reforms having direct cost-saving effects;

	•		an analysis of how changes in the main economic assumptions would affect the budgetary and debt position; and

•

if applicable, the reasons for a deviation from the adjustment path towards the budgetary objective.

Based on assessments by the EU Commission and the Economic and Financial Committee, the Council of the EU delivers an opinion on whether:

	•		the economic assumptions on which the program is based are plausible;

	•		the adjustment path toward the budgetary objective is appropriate; and

	•		the measures being taken and/or proposed are sufficient to achieve the medium-term budgetary objective.

The Council of the EU can issue recommendations to the Participating State to take the necessary adjustment measures to reduce an excessive deficit. When assessing the adjustment path taken by Participating States, the Council will examine whether the concerned Participating State pursues the annual improvement of its cyclically adjusted balance, net of one-off and other temporary measures, with 0.5 per cent of GDP as a benchmark. When defining the adjustment path for those Participating States that have not yet reached the respective budgetary objective or in allowing those that have already reached it to temporarily depart from it, the Council will take into account structural reforms which have long-term cost-saving effects, implementation of certain pension reforms, and whether higher adjustment effort is made in economic good times. If the Participating State repeatedly fails to comply with the Council of the EU’s recommendations, the Council may require the Participating State to make a non-interest-bearing deposit equal to the sum of:

	•		0.2 per cent of the Participating State’s GDP, and

	•		one tenth of the difference between the budget deficit as a percentage of GDP in the preceding year and the reference value of 3 per cent of GDP.

This deposit may be increased in succeeding years if the Participating State fails to comply with the Council’s recommendations, up to a maximum of 0.5 per cent of GDP, and may be converted into a fine if the excessive deficit has not been corrected within two years after the decision to require the Participating State to make the deposit. In addition to requiring a non-interest-bearing deposit, in the event of repeated non-compliance with its recommendations, the Council may require the Participating State to publish additional information, to be specified by the Council, before issuing bonds and securities and invite the European Investment Bank to reconsider its lending policy towards the Participating State. If the Participating State has taken effective action in compliance with the recommendation, but unexpected adverse economic events with major unfavorable consequences for government finances occur after the adoption of that recommendation, the Council may adopt a revised recommendation, which may extend the deadline for correction of the excessive deficit by one year.

Accounting Methodology

Italy historically has used two systems of accounting: state sector and public sector. State sector accounting includes the revenues and expenditures of the Government and certain

agencies and entities whose budgets must be approved by Parliament. Public sector accounting includes the Government, agencies and entities comprising the state sector, as well as entities with budgets not subject to Parliamentary approval (including autonomous agencies, regional and local governments and authorities and the national social security agencies) to the extent the Government receives and transfers funds to those entities. Parliament may review the use of funds transferred by the Government to public sector entities and the financial results of those entities. Both state sector accounting and public sector accounting transactions are recorded on an accrual basis.

Transactions between state-owned joint stock companies and the Government are only included in state sector accounting or public sector accounting to the extent the Government is acting in its capacity as shareholder, for example through the receipt of dividends or the contribution of capital. See “— Government Enterprises.”

Although Italy continues to use public sector and State sector accounting for most internal budgeting and certain other purposes, it also utilizes general government accounting. General government accounting includes revenues and expenditures from both central and local government and from social security funds, or those institutions whose principal activity is to provide social benefits. European Union countries are generally required to use general government accounting for purposes of financial reporting in accordance with European Union requirements. EUROSTAT is the European Union entity responsible for decisions with respect to the application of such general government accounting criteria.

ESA 95 National Accounts. In 1999, ISTAT introduced a new system of national accounts in accordance with the new European System of Accounts (ESA95) as set forth in European Union Regulation 2223/1996. These were intended to contribute to the harmonization of the accounting framework, concepts and definitions within the European Union. Under ESA95, all European Union countries apply a uniform methodology and present their results on a common calendar. In connection with revisions to the national accounting system implemented in December 2005, ISTAT replaced its methodology for calculating real growth, which had been based on a fixed base index, with a methodology linking real growth between consecutive time periods, or a chain-linked index. One of the effects of using chain indices is that other than for the first year in the chain (which for most tables included in this document is 2001) component measures will no longer aggregate to totals. Also, as a result of this change in methodology, all “real” revenue and expenditure figures included in this document from and including 2001 differ from and are not comparable to data published in earlier documents filed by Italy with the SEC. The general government revenues and expenditure figures in this annual report reflect consolidated revenues and expenditures for the public sector, which is the broadest aggregate for which data is available.

Measures of Fiscal Balance

Italy reports its fiscal balance using two principal methods:

•

Net borrowing, or budget deficit, which is consolidated revenues less consolidated expenditures of the general government. This is the principal measure of fiscal balance, and is calculated in accordance with European Union accounting requirements. Italy also

reports its structural net borrowing, which is a measure, calculated in accordance with methods adopted by the EU Commission, of the level of net borrowing after the effects of the business cycle have been taken into account. Structural net borrowing assumes that the output gap, which measures how much the economy is outperforming or underperforming its actual capacity, is zero. As there can be no precise measure of the output gap, there can be no precise measure of the structural budget deficit. Accordingly, the structural net borrowing figures shown in this document are necessarily estimates. In 2003, the EU Commission changed the methods to be used to calculate structural net borrowing. Accordingly, 2002 structural net borrowing data is not directly comparable with that provided for subsequent years.

•

Primary balance, which is consolidated revenues less consolidated expenditures of the general government excluding interest payments and other borrowing costs of the general government. The primary balance is used to measure the effect of discretionary actions taken to control expenditures and increase revenues.

The table below shows selected public finance indicators for the period from 2002 through 2006.

Selected Public Finance Indicators 2002 through 2006


	2002			2003			2004			2005			2006
				(Millions of euro, except percentages)
General government expenditure⁽¹⁾		613,983			648,473			667,190			691,976			729,474
General government expenditure, as a percentage of GDP		47.4	%		48.6	%		48.0	%		48.4	%		49.3	%
General government revenues		576,898			601,859			619,124			631,548			679,840
General government revenues, as a percentage of GDP		44.5	%		45.1	%		44.5	%		44.2	%		45.9	%
Net borrowing		37,085			46,614			48,066			60,428			49,634
Net borrowing, as a percentage of GDP		2.9	%		3.5	%		3.5	%		4.2	%		3.4	%
Primary balance		34,434			21,736			17,628			4,272			18,610
Primary balance, as a percentage of GDP		2.7	%		1.6	%		1.3	%		0.3	%		1.3	%
Public debt		1,367,169			1,392,389			1,443,395			1,511,198			1,575,636
Public debt, as a percentage of GDP		105.6	%		104.3	%		103.8	%		105.8	%		106.5	%


(1)		Includes revenues from the disposal of state-owned real estate (deducted from capital expenditures) for the year 2002 (€10,800 million), 2003 (€2,700 million), 2004 (€4,500 million), 2005 (€3,200 million) and 2006 (€1,400 million).

Source:		For 2005 and 2006 data, Combined Report on the Economy and Public Finance, published in March 2008, and, for the remaining data, Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

On March 11, 2008, the Bank of Italy issued a supplement to its statistical bulletin providing for revised public debt estimate for 2007, which amounted to €1,596,762 million.

Large net borrowing requirements and high levels of public debt were features of the Italian economy until the early 1990s. In accordance with the Maastricht Treaty, the reduction of net borrowing and public debt became a national priority for Italy. Italy gradually reduced its net borrowing as a percentage of GDP to below the 3 per cent threshold set by the Maastricht Treaty

in the late 1990s and the first years of this decade. Net borrowing, however, was higher than the 3 per cent threshold each year from 2003 through 2006 and was estimated to decrease to 1.9 per cent in 2007, compared to 3.4 per cent in 2006.

Following ten years of year on year reductions of public debt as a percentage of GDP, public debt increased from 103.8 per cent of GDP in 2004 to 105.8 per cent in 2005 and 106.5 per cent in 2006. The increase resulted from a mix of factors including, among others, Italy’s decreasing primary surplus and the low growth rate of its GDP, lower receipts from privatizations and the absence of extraordinary transactions aimed at reducing Italy’s public debt. In addition, Italy incurred non-recurring charges in connection with the State’s assumption of debt incurred by Rete Ferroviaria Italiana S.p.A. (“RFI”) and its wholly-owned subsidiary, Treno Alta Velocità S.p.A. (“TAV”) to finance the high-speed railway link between Turin, Milan, Rome and Naples. See also “Public Debt — General.” Since 1999 the Government has taken steps to lengthen the average maturity of debt and reduce the variable rate portion that, together with the introduction of the single currency, made Government debt less sensitive to variations in short-term interest rates and exchange rates.

The Council Recommendation to Italy Relating to its Excessive Government Deficit

On July 12, 2005, the Council performed an overall assessment of Italy’s economic situation pursuant to the Maastricht Treaty. The Council concluded that Italy’s exceeding of the 3 per cent reference value for budget deficit as a percentage of GDP in 2003 and 2004 was not due to unusual events beyond the control of Italian authorities, nor due to a severe and unpredictable economic downturn. Accordingly, the Council adopted a recommendation requiring that Italy’s excessive budget deficit be brought within the 3 per cent reference value.

Subsequently, the Council noted that, given Italy’s high debt-to-GDP ratio, high level of structural deficit and continuing economic slowdown, the adjustment path Italy was called to undertake would require a longer time than would otherwise be imposed under the terms of the Maastricht Treaty in order to ensure the adjustment did not prove economically counter-productive. Accordingly, the Council granted Italy an extension to 2007 to correct its budget deficit and set January 12, 2006 as the time limit for the necessary measures to be implemented, provided these resulted in a cumulative reduction in the structural budget deficit of at least 1.6 per cent of GDP over 2006 and 2007 relative to its level in 2005 (with at least half of this correction occurring in 2006).

On February 24, 2006, the Council performed an assessment of the actions taken by Italy in response to the above mentioned recommendation. Among other things, the Council acknowledged that Italy had set a budget deficit target of less than 3% and adopted corrective measures in the 2006 Budget Law that would ensure adequate progress towards correcting Italy’s excessive budget deficit within the time limits set by the Council. The Council noted, however, that the correction of Italy’s excessive budget deficit by the 2007 deadline and the reduction in Italy’s public debt-to-GDP ratio were subject to significant uncertainties as they assumed a full implementation of the measures in the 2006 Budget Law and favorable economic conditions. Accordingly, the Council concluded that no further steps in the excessive deficit procedure were needed at the time, even though the Commission would continue to closely monitor Italy’s

budgetary developments in accordance with the Maastricht Treaty and the Stability and Growth Pact.

The 2007 Stability and Growth Program

In November 2007, Italy presented the update to its stability and growth program for the period 2007-2011 (“2007 Stability Program”) to the Council of the EU and the EU Commission. The 2007 Stability Program is based on the 2008-2011 Program Document approved by Parliament in July 2007, the RPP for 2008 presented to Parliament on September 27, 2007 and Annual Financial Law approved in December 2006. The following table compares the principal finance indicators included in the stability and growth program for the period 2006-2011 (“2006 Stability Program”) and the 2007 Stability Program:

Comparative Table
2006 Stability Program and 2007 Stability Program Targets


	2006			2007			2008			2009			2010			2011
Real GDP growth rate
2006 Stability Program		1.6			1.3			1.5			1.6			1.7			1.7
2007 Stability Program		1.9			1.9			1.5			1.6			1.7			1.8
Difference		0.3			0.6			0.0			0.0			0.0			0.1
Net Borrowing, as a % of GDP
2006 Stability Program		(4.8	)		(2.8	)		(2.2	)		(1.5	)		(0.7	)		0.1
2007 Stability Program		(4.4	)		(2.4	)		(2.2	)		(1.5	)		(0.7	)		0.0
Difference		0.4			0.4			0.0			0.0			0.0			0.0
Public Debt, as a % of GDP
2006 Stability Program		107.6			106.9			105.4			103.5			100.7			97.8
2007 Stability Program		106.8			105.0			103.5			101.5			98.5			95.1
Difference		(0.8	)		(1.9	)		(1.9	)		(2.0	)		(2.2	)		(2.7	)


Source:		2006 and 2007 Stability Programs.

On February 12, 2008, the Council of the EU issued an opinion setting forth, among others, the following considerations with regard to the achievement of the budgetary targets set forth in Italy’s updated 2007 Stability Program:


	•	The Council noted that the growth assumption for 2008 in Italy’s updated 2007 Stability Program appeared rather favorable, as real GDP growth in 2008 was expected to be clearly below that of the Program. The Council also noted that the Program’s projections for inflation appeared to be on the low side for 2008 and plausible thereafter.

	•	The adjustments made to the budget set out in the updated 2007 Stability Program for achieving the medium-term objective of a balanced budget are inadequate and need to be strengthened to be in line with the Stability and Growth Pact.

	•	The Council noted that there were risks attached to lower GDP growth and the lack of information in the Program on the planned fiscal consolidation. In particular, the Council noted that appropriate measures aimed at curbing expenditure developments remained to be spelled out.

	•	The Council noted that the budgetary implementation in 2007 was in line with the invitation in the Council opinion on the previous update of the stability program related to the correction of the excessive deficit and that the deficit targets for 2008-2011 were likely to remain unchanged from the previous Program. The Council also noted that Italy continues to be at medium risk with respect to sustainability of its public finances.

	•	The long-term budgetary impact of ageing in Italy is lower than the EU average, with pension expenditure showing a more limited increase than on average in the EU, thanks to the pension reforms adopted, assuming they are fully implemented. However, the Council noted that the budgetary position in 2007, which is better than the starting position of the previous Program, contributes to offsetting the projected long-term budgetary impact of ageing but is still insufficient to fully cover future spending pressures.

In its opinion the EU Council invited Italy to:


	(i)	building on the positive results of 2007, strengthen the budgetary target for 2008, so as to secure an ambitious adjustment; and implement the planned fiscal consolidation thereafter, with specified measures to ensure adequate progress towards the medium term objective of a balanced budget, so as to achieve it within the Program period and thus accelerate the pace of debt reduction;

	(ii)	in view of the very high level of government debt, fully implement the pension reforms, notably the planned periodical actuarial adjustment, so as to avoid significant increases in age-related spending; and

	(iii)	spell out the budgetary strategy for the medium term in line with the Stability and Growth Pact and its Code of Conduct, continue the effort to improve the quality of public finances by focusing on their composition, increasing the transparency of the budgetary process and effectively implementing mechanisms to monitor and control expenditure.

The 2008—2011 Program Document contemplates several structural reforms over the five year period aimed at relaunching productivity and increasing employment levels. In particular, the Italian government is committed to implementing a special plan to increase employment of young persons and women. Competitiveness and productivity will be increased through investment in innovation and research and through the modernization of Italy’s administrative system, the improvement of its infrastructure and the adoption of tax measures aimed at reducing tax evasion.

•		Innovation and research (energy sector): To guarantee the security of energy supply, the government intends to encourage the diversification of primary energy sources and create new natural gas supply infrastructure facilities, such as gas pipelines and underground storage. To reduce dependency on foreign suppliers, the government will take steps to better exploit domestic resources and promote renewable energy sources on an industrial scale.

•		Modernisation of Italy’s administration: The Italian government intends to reduce the administrative burden on businesses and citizens by increasing cooperation among the central government, the regions and other local authorities. In particular, the Program Document provides for the reorganization of public administration offices in order to increase their efficiency and reduce costs.

•		Infrastructure: The Government plans to improve Italy’s existing infrastructure by connecting Italy to the Trans-European Network for Transport or TEN-T and by guaranteeing horizontal and vertical links between different parts of the country. Moreover, the Government will take steps to modernize Italy’s existing telecommunication networks and further expand their coverage of the national territory by providing economic incentives and improving regulation of this sector.

The following table shows Italy’s principal public finance targets for the years indicated, as well as the gross domestic product, inflation and unemployment assumptions underlying the Program Document, as updated in November 2007.

2008-2011 Program Document Objectives


	2008			2009			2010			2011
GDP (% real growth rate)		1.5			1.6			1.7			1.8
Unemployment rate (%)		6.2			6.1			5.8			5.6

Net borrowing (budget surplus), as a percentage of GDP		2.2			1.5			0.7			—
Primary balance, as a percentage of GDP		2.6			3.4			4.2			4.9
Public debt, as a percentage of GDP		103.5			101.5			98.5			95.1

Structural net borrowing (budget surplus), net of one-off measures, as a percentage of GDP		(2.1	)		(1.3	)		(0.6	)		0.1
Structural net borrowing (budget surplus), as a percentage of GDP		(2.0	)		(1.3	)		(0.5	)		0.2
Structural primary balance, as a percentage of GDP		2.9			3.6			4.4			5.0
Structural primary balance, net of one-off measures, as a percentage of GDP		2.8			3.6			4.3			4.9


Source:		2008-2011 Program Document and update to 2008-2011 Program Document.

The Program Document targets real GDP growth of 1.5 per cent in 2008, which is unchanged from the growth percentage targeted in the 2007-2011 Program Document. It also targets annual budget deficit reductions with the budget deficit as a percentage of GDP decreasing progressively from 2.2 per cent in 2008 to 0.7 per cent and 0.0 per cent in 2010 and 2011, respectively. The targeted reductions in budget deficits in the 2008-2011 Program Document are slightly more ambitious than those set forth in the 2007-2011 Program Document. This reflects substantially similar targets for primary surplus as a percentage of GDP, increasing from 2.6 per cent in 2008 to 4.9 per cent in 2011, in the 2008-2011 Program Document, compared to targets of 2.7 per cent for 2008 and 4.9 per cent in 2011 in the 2007-2011 Program Document.

The objectives and forecasts set forth in the Program Document are based on assumptions relating to future economic developments, including international economic trends, and may therefore not be realized. In addition, the forecasts set forth in the Program Document differ from the most recent forecasts of the IMF. In particular, according to its World Economic Outlook Report published on April 9, 2008, the IMF forecasts:

•		Italy’s real GDP annual growth rate at 0.3 per cent for 2008 and 2009;

•		its budget deficit as a percentage of GDP to increase to 2.5 per cent in 2008 and 2009, reaching 2.2 per cent in 2013; and

•		a decrease in its debt-to-GDP ratio to 103.6 in 2008, followed by an increase to 104 per cent in 2009, reaching 102.6 per cent in 2013.

Revenues and Expenditures

The following table sets forth general government revenues and expenditures and certain other key public finance measures for the six years ended December 31, 2007, including preliminary estimates for the year 2007. The table does not include revenues from privatizations,


	2002⁽¹⁾			2003⁽¹⁾			2004⁽¹⁾			2005			2006			2007
	(Millions of euro, except percentages)
Expenditures
Current expenditures		567,051			590,664			612,741			633,599			655,466			684,932
of which
Total consumption		238,456			250,382			262,846			275,365			281,881			286,105
of which
Wages and salaries		137,621			144,749			149,861			156,542			162,889			164,645
Cost of goods and services		100,835			105,633			112,985			118,823			118,992			121,460
Interest expense		71,519			68,350			65,694			64,700			68,244			76,726
Social services		214,078			224,485			234,701			242,346			252,119			265,284
Other current expenditures		42,998			47,447			49,500			51,188			53,222			56,817
of which
Production grants		14,450			14,213			14,328			N/A			N/A			N/A
Capital expenditures⁽²⁾		46,932			57,809			54,449			58,377			74,008			68,493
of which
Investments		22,468			32,778			33,142			33,711			34,792			36,134
Investment grants		18,440			23,397			19,825			21,988			22,292			24,769
Other capital expenditures		6,024			1,634			1,482			2,678			16,924			7,590
Total Expenditures		613,983			648,473			667,190			691,976			729,474			753,425
as a percentage of GDP		47.4	%		48.6	%		48.0	%		48.4	%		49.3	%		49.1	%

Revenues
Current revenues		571,231			579,569			606,944			625,596			675,366			719,632
of which
Tax revenues		364,728			365,515			380,732			394,422			433,714			459,888
of which
Direct taxes		179,554			178,745			185,331			189,815			213,308			233,660
Indirect taxes		185,174			186,770			195,401			202,736			220,181			225,928
Social security contributions		161,275			168,776			175,965			183,445			189,683			204,772
Revenues from capital		8,249			8,094			7,609			1,871			225			300
Other current revenues		36,979			37,184			42,638			49,600			52,194			55,272
Capital revenues		5,667			22,290			12,180			4,081			4,249			4,314
Total revenues		576,898			601,859			619,124			631,548			679,840			724,246
as a percentage of GDP		44.5	%		45.1	%		44.5	%		44.2	%		45.9	%		47.2	%

Current surplus/(deficit)		4,180			(11,095	)		(5,797	)		(8,003	)		19,900			34,700
as a percentage of GDP		0.3	%		(0.8	)%		(0.4	)%		(0.6	)%		1.3	%		2.3	%
Net borrowing		37,085			46,614			48,066			60,428			49,634			29,179
as a percentage of GDP		2.9	%		3.5	%		3.5	%		4.2	%		3.4	%		1.9	%
Primary balance		34,434			21,736			17,628			4,272			18,610			47,547
as a percentage of GDP		2.7	%		1.6	%		1.3	%		0.3	%		1.3	%		3.1	%
GDP (nominal value)		1,295,226			1,335,354			1,390,539			1,428,375			1,479,981			1,535,540

General government expenditures and revenues have increased in each of the years 2002-2006 and are expected to increase in 2007. General government expenditures rose by 5.4 per cent in 2006, compared to 3.7 per cent in 2005. Higher expenditure growth in 2006 was principally due to higher capital expenditures, which accounted for 5.0 per cent of GDP in 2006, compared to 4.1 per cent in 2005, and higher social services expenditures, which accounted for 17.1 per cent of GDP in 2006 compared to 17.0 per cent in 2005.

Capital expenditure increased by 26.8 per cent in 2006, compared to 7.2 per cent in 2005. The sharp increase in capital expenditure is principally due to extraordinary charges resulting from the Government decision in December 2006 to recognize as State debt, with effect as from 2004, approximately €13 billion of State-guaranteed debt incurred by ISPA. ISPA had incurred this debt in connection with the financing of the high-speed railway network. The increase in capital expenditure in 2006 is also due to extraordinary charges relating to the sale by Italy of receipts relating to social contributions due by agricultural workers (€0.7 billion) and the reimbursement of taxes paid by providers of telecommunications services (€0.7 billion).

General government revenue increased by 7.6 per cent in 2006, compared to 2.0 per cent in 2005. The faster general government revenue growth was due to current revenues, which increased by 8.0 per cent in 2006, compared to 3.1 per cent in 2005, primarily due to higher growth in tax revenues and social security contributions.

Italy recorded a current account surplus of €19.9 billion in 2006 compared to a deficit of €8 billion in 2005 and of €5.8 billion in 2004, principally due to an acceleration in the growth of direct and indirect tax receipts compared to expenditures attributable to wage and salaries and costs of goods and services. Italy registered a current account deficit from 2003 to 2005, following four years of steadily declining current account surplus, principally due to faster growth of wage and salaries, costs of goods and services and expenditures from social security services, compared to receipts from taxes and social security contributions.

Expenditures

Italy has a comprehensive system of social services, including public health, public education and pension, disability and unemployment benefits programs, most of which are administered by the Government or by local authorities receiving Government funding. These social services are funded in part by contributions from employers and employees and in part from general tax revenues.

Social Services. Social Services includes expenditures for pensions, disability and unemployment benefits. The two principal social security agencies for private sector employees, the Istituto Nazionale Previdenza Sociale (“INPS”) and the Istituto Nazionale Assicurazioni e Infortuni sul Lavoro (“INAIL”), provide old-age pensions and temporary and permanent disability compensation for all the employees of the private sector and their qualified dependents and coverage for accidents in the workplace or permanent disability as a consequence of employment for workers of the industrial and agricultural sectors and for certain service sector employees. The social security entity for government employees, the Istituto Nazionale di Previdenza per i Dipendenti dell’Amministrazione Pubblica (“INPDAP”), provides similar services.

Old-age pensions in Italy, as in much of the developed world, continue to present a significant structural fiscal problem. Controlling pension spending is a particularly important Government objective given Italy’s aging population. The following are the principal reforms to the Italian pension system since 1992:

	•		Beginning in 1992, the Government adopted several measures designed to control the growth of pension expenditures. Among other measures, the Government abolished the indexation of pensions to reflect wage increases and froze or delayed early retirement pensions for certain categories of workers, raised the retirement age and increased the minimum contribution period for early retirement pensions.

	•		In 1995, Parliament enacted legislation to reform the pension system. Under these reforms, each individual’s pension is determined on the basis of the contributions, adjusted for GDP growth, made to the system by the individual or by his employer on his behalf. No additional contributions are made by the Government. The Government, however, continues to provide welfare and disability pensions. Individuals with lower levels of contribution to the public pension system are encouraged to seek additional pension benefits through voluntary contributions to private funds.

	•		In July 2004, Parliament enacted legislation to further reform Italy’s pension system. The reform, which will take effect in 2008, will further raise the retirement age and increase minimum contribution periods required to qualify for early retirement pension and old age pension, as shown in the table below. In addition, the reform includes incentives to employees to delay retirement and, as with the 1995 reforms, seek additional pension benefits through contributions to private funds. The reform also will substantially delay end-of-employment payments.

Key 2004 Pension Reforms


	Requirement to Qualify for:
	Early Retirement Pension	Old-Age Pension
2004	(a) 57 years of age and 35 years of contributions; or	(a) 57 to 65 years of age and 5 years of contributions; or
	(b) 38 years of contributions, regardless of age	(b) 40 years of contributions, regardless of age

2005-2007	(a) 57 years of age and 35 years of contributions; or	Unchanged
	(b) 38 years of contributions, regardless of age, increasing to 39 years of contributions in 2006 and 2007

2008-2009	(a) 60 years of age and 35 years of contributions; or	(a) 65 years of age for men (60 for women) and 5 years of contributions; or
	(b) 40 years of contributions, regardless of age	(b) 60 years of age and 35 years of contributions; or
		(c) 40 years of contributions, regardless of age

2010-2013	(a) 61 years of age and 35 years of contributions; or	(a) 65 years of age for men (60 for women) and 5 years of contributions; or
	(b) 40 years of contributions, regardless of age	(b) 61 years of age and 35 years of contributions; or
		(c) 40 years of contributions, regardless of age

From 2014	(a) 62 years of age and 35 years of contributions; or	(a) 65 years of age for men (60 for women) and 5 years of contributions; or
	(b) 40 years of contributions, regardless of age	(b) 62 years of age and 35 years of contributions; or
		(c) 40 years of contributions, regardless of age

Expenditures for social services grew by 4.4 per cent in 2006, compared to 3.3 per cent in 2005 and 4.5 per cent in 2004. As a percentage of GDP, social services expenditures increased to 17.1 per cent in 2006 from 17.0 per cent in 2005 and 16.9 per cent in 2004.

Expenditures for public health and public education. Expenditures for public health and education are accounted for under wages and salaries, cost of goods and services and production grants. Italy has a public health service run principally by regional governments with funds provided by the Government. Local health units adopt their own budgets, establish targets and

monitor budget developments. Public health care expenditures grew by 5.7 per cent in 2006, compared to a growth of 6.4 per cent in 2005, principally due to an increase in expenditures for pharmaceutical products.

Italy has a public education system consisting of elementary, middle and high schools and universities. Attendance at public elementary, middle and high schools is generally without charge to students, while tuition payments based on income level are required to attend public universities. Public schools generally follow a standard curriculum, and nationwide testing is used for graduation purposes. In March 2003, the Government implemented a major reform of the education system (referred to as “Riforma Moratti”), which, among other things, increased the number of years of compulsory education from ten to twelve and created a tutoring program in order to provide additional assistance to students during the entire course of their scholastic career.

Compensation of public employees. Compensation of public employees increased by 4.0 per cent in 2006 compared to 4.4 per cent in 2005, due to the renegotiation and subsequent renewal of certain collective bargaining agreements, such as the ones relating to employees of the national health service (approximately 680,000 units) and of local public administrative offices (approximately 560,000 units). The number of public employees remained substantially unchanged in 2005 and 2006.

Interest payments. Interest payments by the Government increased by €3.3 billion in 2006, after declining by €1.5 billion in 2005. The ratio of interest payments to GDP, after falling from 12.1 per cent in 1993 to 4.5 per cent in 2005, rose to 4.6 per cent in 2006. Average interest rates, which had fallen from 5.2 per cent in 2002 to 4.6 per cent in 2005, increased to 5.2 per cent in 2006. This growth was curbed by net receipts from swap agreements amounting to €0.6 billion, down from €2.4 billion in 2005. Excluding the effect of these transactions, the average cost of debt declined from 4.4 per cent in 2005 to 4.3 per cent in 2006 as the redemption of high-yield medium and long-term securities more than offset the rise in yields. The average gross rate on BOTs fell from 5.1 per cent in October 2000 to 1.9 per cent in June 2003, and rose to 2.1 per cent at the end of 2003 and 2004. It remained substantially stable at 2.1 per cent throughout the first ten months of 2005, rising to 2.5 per cent at the end of that year. In 2006, the average gross rate on BOTs further increased to 3.3 per cent. Similarly, the gross yield on ten-year domestic bonds fell from 5.7 per cent in September 2000 to 3.7 per cent at June 2003 and rose to 4.4 per cent at the end of 2003. It remained stable at 4.4 per cent until June 2004, then fell to 3.5 per cent at the end of 2005. In 2006, it rose again to 4.0 per cent.

VAT Deductibility Dispute. On March 21, 2005, the Tax Court of First Instance of Trento (Commissione Tributaria di Primo Grado di Trento) instituted a proceeding before the ECJ, requesting a preliminary ruling in the proceedings between Stradasfalti Srl and Agenzia Entrate Ufficio Trento clarifying within which limits and under what conditions member states may introduce exceptions to the right of persons conducting certain economic activities (e.g. freelance professionals) to deduct VAT on transactions relating to specific goods and services, as provided by the EU Sixth Directive on the harmonization of the laws of the member states relating to turnover taxes. Article 17(7) of the Sixth Directive provides that member states may — subject to a previous consultation of a specific EU advisory committee, the “VAT Committee” — totally or

partially exclude certain goods from the system of VAT deductions for “cyclical economic reasons.”

On September 14, 2006, the ECJ ruled that Italy’s law on the non-deductibility of VAT on acquisitions of goods and services related to motor vehicles and on the acquisition of fuel and lubricants, which has been in force since 1979, violated the Sixth Directive’s provisions. In the Court’s opinion, this limitation was implemented by Italy without previously consulting the above mentioned VAT Committee and cannot be viewed as a measure introduced for cyclical economic reasons due to its existence since 1979.

Immediately following this decision, Law Decree no. 258/2006 was implemented by the Italian Government on September 15, 2006, entitling people who purchased and imported motor vehicles, fuel and lubricants until September 13, 2006 to present a request to the Italian Revenue Agency for the reimbursement of the relevant amounts paid as VAT in connection with such transactions. On September 30, 2006, the Italian Ministry of Economy and Finance presented an update to its 2007-2011 Program Document, estimating that the ECJ’s judgment will cause a decrease in public tax returns of approximately €3.7 billion in 2006 and a tax burden of approximately €13.4 billion for the VAT reimbursements relating to the period 2003-2005. Following the enactment of certain legal measures and the limited number of VAT reimbursement claims proposed during the year 2007, in agreement with Eurostat, the Government subsequently revised its estimates. In particular, the Government did not account for the effects of the ECJ ruling with effect on the results of the period 2003-2006, contrary to what was anticipated in the update to the 2007-2011 Program Document. Instead, it accounted for the effects of the first VAT reimbursement claims recording reimbursements for approximately €0.8 billion for the year 2007. On the basis of the total number of claims expected, the Government estimates further reimbursements for approximately €0.4 billion per year during the period 2008-2011.

Revenues

Taxes. Italy’s tax structure includes taxes imposed at the State and local levels and provides for both direct taxation through income taxes and indirect taxation through a value added tax (“VAT”) and other transaction-based taxes. Income taxes consist of an individual tax levied at progressive rates and a corporate tax levied at a flat rate. In 2006, the maximum individual tax rate and the maximum corporate tax rate remained unchanged from 2005, at 43 per cent and 33 per cent, respectively. Corporations also pay local taxes, and the deductibility of those taxes for income tax purposes has been gradually eliminated over the last few years.

VAT is imposed on the sale of goods and the rendering of services performed for consideration in connection with business or professions and on all imports of goods or services. Italy has issued legislation to harmonize its VAT with applicable European Union directives. The basic VAT rate is 20 per cent, although certain goods and services qualify for an exemption from VAT or a reduced rate. In addition to VAT, indirect taxes include customs duties, taxes on real estate and certain personal property, stamp taxes and excise taxes on energy consumption, tobacco and alcoholic beverages.

Italy has negotiated bilateral treaties for the avoidance of double taxation with virtually all industrialized countries.

Low taxpayer compliance has been a longstanding concern for the Government, which has adopted measures to increase compliance. Some of these measures are aimed at identifying tax evasion and include systems of cross-checks between the tax authorities and social security agencies, public utilities and others. One of the areas of greatest concern to the Government has been under-reporting of income by self employed persons and small enterprises. The Government’s efforts to increase tax compliance since 2001 have led to an increase in the general tax base and to an improvement in compliance.

Italy’s fiscal burden, which is the aggregate of direct and indirect taxes and social security contributions as a percentage of GDP, remained substantially unchanged in 2004 and 2005, at 40.0 per cent and 40.5 per cent, respectively, and increased to 42.3 per cent in 2006, principally due to a steady increase in direct and indirect taxes.

The following table sets forth the composition of tax revenues for each of the five fiscal years ended December 31, 2006.

Composition of Tax Revenues⁽¹⁾


	2002		2003		2004		2005		2006
	(Millions of euro)
Direct taxes⁽¹⁾
Personal income tax		120,204		124,238		127,689		132,663		142,061
Corporate income tax		29,651		29,022		28,073		33,699		39,475
Investment income tax		10,598		8,543		7,914		8,882		12,193
Other⁽²⁾		9,860		15,796		18,640		4,368		9,656
Total direct taxes		170,313		177,599		182,316		179,612		203,385

Indirect taxes⁽¹⁾
VAT		93,881		96,177		100,051		105,008		114,166
Other transaction-based taxes		16,499		15,789		18,176		18,054		20,395
Production taxes		24,667		26,087		24,906		26,615		26,690
Tax on State monopolies		7,685		7,770		8,502		8,511		9,349
National Lottery		8,858		6,839		14,658		12,364		10,191
Others		2,003		5,144		3,167		2,144		2,251
Total indirect taxes		153,593		157,806		169,460		172,696		183,042

Total taxes		323,906		335,405		351,776		352,308		386,427


(1)		The data presented in this table does not correspond to the general Government direct and indirect tax revenue figures contained in the preceding table entitled “General Government Revenues and Expenditures,” primarily because the “Composition of Tax revenues” table is prepared on a cash basis while the “General Government Revenues and Expenditures” table is prepared on an accrual basis in accordance with ESA95. Generally, State sector accounting does not include indirect taxes levied by, and certain amounts allocable to, regional and other local governments and entities. However, because this table is prepared on a cash basis, it reflects tax receipts of entities that are excluded from State sector accounting (such as local government entities) that are collected on their behalf by the State (and subsequently transferred by the State to those entities).

(2)		The taxes classified as “other” are non-recurring and, accordingly, this item is highly variable.

Source: Bank of Italy and Ministry of Economy.

Government Enterprises

The following chart summarizes certain key data for each of the principal state-owned enterprises for the periods indicated. The Government currently continues to participate in the election of the respective boards of directors but does not directly participate in the management of these companies.

Principal Government Enterprises⁽¹⁾


		Per cent of
		Government	Total Assets		Total Liabilities		Net profit (loss)
		Ownership as of	At December 31,				As of December 31,
Company	Industry Sector	December 31, 2006	2006		2006		2004			2005			2006
	(Millions of euro)
Alitalia Linee Aeree Italiane S.p.A.	Airline Banking/	49.9%		4,184		3,298		(812	)		(168	)		(626	)
Cassa Depositi e Prestiti	Financial Services	70.0%		180,692		167,409		286			1,642			2,053
ENEL S.p.A.	Electricity/Utility	31.3%⁽²⁾		54,500		35,475		2,706			4,398			3,335
ENI S.p.A.	Energy	30.3%⁽²⁾		88,312		47,113		7,274			9,247			9,823
Ferrovie dello Stato S.p.A.	Railroads	100.0%		73,610		18,414		(125	)		(465	)		(2,119	)
Poste Italiane S.p.A.	Post	100.0%⁽²⁾		26,861		30,544		292			349			676
Finmeccanica S.p.A.	Aerospace/Defense	33.80%		23,381		18,024		526			396			1,020
RAI Holding S.p.A.	Broadcasting	99.6%		1,584		1,036		82			23			(87	)


(1)		Percentages refer to the holding company (S.p.A.), while financial data is presented on a consolidated basis.

(2)		Including shares indirectly owned by the Government through Cassa Depositi e Prestiti S.p.A. In December 2003 the Treasury transferred shares representing 10.16 per cent of ENEL, 9.99 per cent of ENI and 35 per cent of Poste Italiane to Cassa Depositi e Prestiti (“CDP”), a wholly owned entity with historical responsibility for promoting local development and managing postal savings instruments, in exchange for the transfer by CDP to the Treasury of approximately €11 billion. These transfers were part of a series of transactions that included the conversion of CDP into a joint stock company, the further assumption by the Treasury of a portion of CDP’s assets and liabilities, and the subsequent sale by the Treasury of a 30 per cent minority stake in CDP to 65 Italian banking foundations for an aggregate consideration of €1.1 billion.

Source: Ministry of Economy and Finance.

Finmeccanica is Italy’s second largest manufacturer in the aerospace and defense sector. Due to Finmeccanica’s involvement in the defense sector, the Government has maintained a significant interest in the share capital of the company through the Ministry of Economy and Finance, has retained a golden share, and has limited the maximum ownership of any other shareholder to 3 per cent.

Alitalia, Italy’s national airline, was partially privatized in 1998 and re-capitalized in early 2002. Following a capital increase in December 2005, the Ministry of Economy and Finance’s stake decreased to 49.9 per cent. For more information on Alitalia, see “Italian Economy — Principals sectors of the Economy.”

Privatization Program

Privatizations managed by the Italian Treasury. Since 1994, the Treasury has carried out a number of privatizations in the financial institution and telecommunications sector and of integrated oil companies and electricity utilities. Based on Treasury data, from February 1994 to

December 2005 the Government raised approximately €153 billion (including revenues from the IR-Fintecna disposal program), making the Italian privatization program one of the largest privatization programs in Europe. In 2006 and 2007, the Ministry of Economy and Finance did not carry out any sales of shareholdings directly owned by it.

The Italian Treasury currently holds majority or controlling interests in 28 public companies. Italy will continue to rely on proceeds from privatizations, state-owned real estate disposals and securitizations to reduce public debt as a percentage of GDP and achieve the targets set out in its 2008-2011 Program Document. The table below illustrates the principal Italian privatizations since 1994 that generated proceeds of over €96 billion.

Principal Privatizations Managed Directly by the Italian Treasury (from 1994 to 2007)

Gross proceeds in

Percentage of

Company Name

Industry Sector

Offer Date

Offering Type

millions of euro

capital disposed of

IMI

Banking

Feb 1994

Public Offering

927

27.90

⁽¹⁾

INA

Insurance

June 1994

Public Offering

2,343

47.45

⁽¹⁾

IMI

Banking

July 1995

Private Placement

472

14.48

INA

Insurance

Oct 1995

Private Placement

871

18.37

ENI

Oil

Nov 1995

Public Offering

3,254

15.05

⁽¹⁾

INA

Insurance

June 1996

Exchangeable

1,684

31.08

ENI

Oil

Nov 1996

Public Offer

4,586

16.19

⁽¹⁾

ENI

Oil

July 1997

Public Offering

6,833

18.21

⁽¹⁾

Telecom Italia

Telecom

Nov 1997

Public Offer /Private
Placement

11,818

29.18

Seat

Publishing

Nov 1997

Competitive Bidding

854

44.74

ENI

Oil

July 1998

Public Offer

6,712

15.20

⁽¹⁾

BNL

Banking

Sept/Dec 1998

Public Offer /Private
Placement

3,464

68.25

ENEL

Utility

Nov 1999

Public Offer

16,550

32.42

Mediocredito Centrale

Banking

Dec 1999

Trade Sale

2,037

100.00

Banco di Napoli

Banking

Nov 2000

Government Tender
in Public Offer

494

16.16

ENI

Oil

Feb 2001

Competitive Bidding

2,721

5.00

Telecom Italia

Telecom

Dec 2002

Private Placement /Trade
Sale

1,434

2.67

ENEL

Electricity

Nov 2003

Private Placement

2,173

6.60

Cassa Depositi e Prestiti

Banking/Financial
Service

Dec 2003

Private Placement

1,050

30.00

Ente Tabacchi Italiani

Manifacturing

Dec 2003

Public Offer

2,325

100.00

ENEL

Electricity

Oct 2004

Public Offer

7,636

19.31

ENEL

Electricity

July 2005

Public Offer

4,101

9.42


(1)		Inclusive of bonus shares which were allocated to Italian retail investors who retained the shares sold for a specified period.

Source: Ministry of Economy and Finance.

Italy’s legislation governing privatizations contemplates a variety of methods of sale, including public offerings (including employee offerings), public auctions, private placements and trade sales, and also allows the creation of stable core shareholder groups. In addition, this legislation grants the State certain special powers in connection with any transfer of a controlling interest in certain state-owned companies operating in public service sectors.

Under Italian law, and in order to achieve the public finance objectives established with the Maastricht Treaty, all proceeds of the privatization of entities directly owned by the Treasury are deposited into a fund established in 1993 (Fondo per l’ammortamento dei titoli di Stato), prior to their use for the purchase or repayment of outstanding Treasury securities.

The original purpose of the privatization program was to reduce the level of direct Government ownership; thereby lowering the level of State subsidy and improving industrial efficiency. The privatization program has resulted in a major structural change in the Italian industrial and financial markets, with a significant decrease in direct Government involvement in the management of industrial and financial companies.

The success of the privatization program is largely attributable to capital market reforms, to the implementation of a clear regulatory framework and to the increased interest by Italian retail investors in the equity market. The Italian Stock Exchange was privatized in 1997 and initiatives have been introduced to protect minority shareholders, promote transparent corporate governance and eliminate barriers to changes in corporate control. Increased participation by retail investors in domestic capital markets has been a leading contributor to the success of Italy’s privatization program. Prior to the commencement of Italy’s privatization program in 1993, Italy’s domestic retail investors historically had demonstrated a strong preference for investing in Government bonds and other fixed income securities rather than equities. As Italy has historically benefited from one of the highest domestic saving rates in Western Europe, the success of Italy’s privatization program has been largely attributable to the Government’s ability to attract domestic savings and promote the growth of equity investment. The Government has attained this goal through a combination of innovative offer structures, attractive retail incentive packages and widespread marketing campaigns. Between 1991 and 2006, the ratio of overall market capitalization of Italian Stock Exchange listed companies to nominal GDP increased from 12 per cent to 53 per cent, having reached a peak of 70 per cent in 2000. At December 31, 2006 total market capitalization was €779 billion, up from €677 and €569 billion as of December 31, 2005 and 2004, respectively.

Privatizations managed by IRI. IRI has played a major role in the Italian privatization program. Proceeds from the privatization activities of the IRI group were €56.6 billion for the period from July 1992 to December 2001. During the three years ended December 31, 2002, IRI paid to the Ministry of Economy and Finance, its shareholder, dividends totaling €6.2 billion. On June 27, 2000 IRI was put into liquidation proceedings having completed its mandate. In connection with its liquidation IRI made advance payments to the Ministry of Economy and Finance amounting to €8.0 billion in 2000 and €3.0 billion in 2001. On November 30, 2002, IRI merged into Fintecna S.p.A.

Major Privatizations Managed Directly by IRI in the Period 1999-2001

Gross revenue in

Percentage of

Company Name

Industry Sector

Offer Date

Offer Type

millions of euro

capital disposed of

Autostrade

Infrastructure

Oct 1999

Private Placement

2,536

30.0

Infrastructure

Dec 1999

Secondary Public Offer

4,185

52.0

Aeroporti di Roma

Infrastructure

Nov 1999/June 2000

Private Placements

1,379

54.2

Finmeccanica

Aerosp./Defense

June 2000

Secondary Public Offer

5,505

43.8

Cofiri

Financial services

Feb 2001

Private Placement

508

100.0


Source:		Treasury’s evaluations based on IRI data.

Government Real Estate Disposal Program

The Government plans to dispose of real estate assets to reduce costs associated with owning those assets and to further reduce State debt. In September 2001, the Government approved new legislation to accelerate its real estate disposal program. The program was extended to all of the State’s real estate assets, including real estate assets owned by social security entities, and includes a securitization program. The Government completed its first real estate securitization transaction in December 2001. Pursuant to Eurostat methodology, the €2.1 million in proceeds received at that time have been amortized in Italy’s ESA 95 National Accounts over the three-year period 2002-2004. The Government completed its second real estate securitization transaction in December 2002, raising proceeds of €6.6 billion. In December 2004 and December 2005 the Government disposed of additional real estate assets through sales to two real estate investment funds, raising proceeds of €3.3 billion and €600 million in 2004 and 2005, respectively.

PUBLIC DEBT

General

The Annual Financial Law and the Budget Law authorize the incurrence of debt by the Government. See “Public Finance — The Budget Process.” The Annual Financial Law sets a gross limit on issuances of Treasury securities other than Buoni Ordinari del Tesoro or BOTs, which are zero-coupon notes with a three-, six-, or twelve-month maturity. The Budget Law sets a net limit on all issuances of Treasury securities, excluding issuances to refinance outstanding Treasury securities. In addition to Treasury securities and borrowings, Italy’s public debt includes debt incurred by public social security agencies, regional and local governments and other authorities.

The Treasury administers the public debt and the financial assets of Italy. The Bank of Italy provides technical assistance to the Treasury in connection with auctions for domestic bonds and acts as paying agent for Treasury securities.

The following table summarizes Italy’s public debt as of the dates indicated, including debt represented by Treasury securities and liabilities to holders of postal savings.

Public Debt


							December 31,
	2002			2003			2004			2005			2006
	(Millions of euro, except percentages)
Debt incurred by the Treasury:
Short term bonds (BOT)⁽¹⁾		113,740			119,645			118,750			117,806			122,780
Medium and long term bonds (initially incurred or issued in Italy)		946,535			952,084			979,506			1,006,589			1,048,726
External bonds (initially incurred or issued outside Italy)⁽²⁾		81,201			84,147			85,262			87,799			75,200
Total Treasury Issues		1,141,476			1,155,876			1,183,518			1,212,193			1,246,706
Postal savings⁽³⁾		138,301			75,939			74,754			70,578			65,622
Postal accounts⁽⁴⁾		15,614			28,038			46,331			75,638			87,937
Debt incurred by:
FS bonds and other debt⁽⁵⁾		4,889			3,408			1,753			1,744			1,284
ISPA bonds and other debt⁽⁶⁾		—			—			7,211			12,976			12,989
ANAS bonds and other debt⁽⁷⁾		384			218			52			—			—
Other State sector entities^{(8) (9)}		9,503			41,695			41,181			38,702			44,603
Other general government entities⁽⁹⁾		57,002			87,215			88,595			99,367			116,300
Total public debt		1,367,169			1,392,389			1,443,395			1,511,198			1,575,441
as a percentage of GDP		105.6	%		104.3	%		103.8	%		105.8	%		106.5	%
Treasury accounts⁽¹⁰⁾		(21,185	)		(13,048	)		(15,709	)		(14,535	)		(22,778	)
Total public debt net of Treasury accounts		1,345,984			1,379,341			1,427,686			1,496,663			1,552,663


(1)		BOTs (Buoni Ordinari del Tesoro) are short-term, zero-coupon notes with a maturity of three, six or twelve months.

(2)		Italy often enters into currency swap agreements in the ordinary course of the management of its debt. The total amount of external bonds shown above takes into account the effect of these arrangements.

(3)		Postal savings are demand, short- and medium-term deposit accounts, as well as long-term certificates that may be withdrawn by the account owner prior to maturity with nominal penalties. As of the date of conversion of Cassa Depositi e Prestiti (“CDP”) into a joint stock company in 2003 (Cassa Depositi e Prestiti S.p.A.), the Ministry of Economy and Finance assumed certain postal savings liabilities as described in greater detail below.

(4)		Postal accounts are demand, short- and medium-term deposit accounts held by the private sector and by the Treasury on behalf of public companies, such as Fintecna S.p.A. and companies formed in connection with securitization transactions carried out by the Treasury.

(5)		Includes debt securities issued by Ferrovie dello Stato S.p.A., or FS, the State railway entity and other debt incurred by FS and assumed by the Treasury by law in 1996.

(6)		The indebtedness of Infrastrutture S.p.A., or ISPA, in relation to the TAV project (high-speed railroad infrastructure), is included since 2004, as it is recorded as government debt. For more information, see below.

(7)		Includes ANAS (Azienda Nazionale Autonoma delle Strade) bonds, which are securities issued by ANAS S.p.A. (the state owned entity in charge of road maintenance and construction), the State Road Board and other debt incurred by ANAS.

(8)		Includes loans and securities issued by certain entities, loans refunded by the central Government and loans granted by CDP to the local governments. All indebtedness included in this line item is net of Treasury securities owned by such entities.

(9)		The increase in debt of “other State sector entities” and “other general government entities” in 2003 was largely due to the conversion of CDP into a joint stock company in 2003, as described in greater detail below.

(10)		The line item “Treasury accounts” includes all the funds of the Treasury deposited with the Bank of Italy, including the sinking fund, supplied by privatizations. See “Monetary System — Monetary Policy.”

Source: Ministry of Economy and Finance.

	•		the conversion of Cassa Depositi e Prestiti into a joint stock company in 2003 described below, which at the time reduced Italy’s debt-to-GDP ratio by 0.8 per cent; and

	•		the exchange of BTPs between the Ministry of Economy and Finance and the Bank of Italy in 2002 described below, which at the time resulted in a 1.8 per cent reduction of Italy’s debt-to-GDP ratio.

The increase recorded in 2005 and 2006 was attributable to a mix of factors including, among others, Italy’s decreasing primary surplus and the low growth rate of its GDP, recorded in 2005, lower receipts from privatizations and the absence of extraordinary transactions aimed at reducing Italy’s public debt. This increase also reflected the effects of non-recurring charges related to the decision taken by the Government in December 2006, with effect as from 2004, to classify as State debt certain debt, guaranteed by the Government, incurred by Rete Ferroviaria Italiana S.p.A. (“RFI”) and its wholly-owned subsidiary, Treno Alta Velocità S.p.A. (“TAV”) to finance the high-speed railway link between Turin, Milan, Rome and Naples; the majority of such debt is represented by the amount outstanding under a loan provided by Infrastrutture S.p.A. (“ISPA”), a company indirectly controlled by the Government, to RFI and TAV following a bond issuance by ISPA, the proceeds of which were lent to RFI and TAV. The Government decision followed the ruling by Eurostat on this matter in May 2005. The amount of debt of RFI and TAV, guaranteed by the Government and outstanding as of December 31, 2006, was approximately €13 billion.

Conversion of Cassa Depositi e Prestiti. On December 5, 2003, the Ministry of Economy and Finance issued a Decree pursuant to which Cassa Depositi e Prestiti (“CDP”), an administrative entity with historical responsibility for promoting local development, including lending to local government entities, and managing postal savings instruments, was converted into a joint stock company, wholly owned by the Italian Treasury. Subsequently, in December 2003, the Treasury sold a 30% stake in CDP to 65 Italian banking foundations.

From December 12, 2003, the date of its conversion into a joint stock company, CDP is no longer considered part of the general government and its liabilities are no longer accounted for as public debt. In connection with the conversion of CDP into a joint stock company:

	•		the Ministry of Economy and Finance assumed €101 billion of CDP’s postal bonds and accounts, shown in the table above as “Postal Savings.” Prior to December 2003, Italy accounted for CDP’s entire postal savings liabilities under “Postal Savings”;

	•		the remaining CDP obligations in respect of postal savings (amounting approximately to €73 billion) ceased to be accounted for as a portion of public debt; and

	•		loans totaling €28 billion, granted by CDP to local government entities, which previously had not been accounted for as public debt as they were loans made from one general government entity to another, were thenceforth included in public debt of local government entities (shown in the table above under “other general government entities”) or in the debt of central government, when it was fully committed to the refunding (“other State sector entities” in the table above). The increase in debt of “other State

sector entities” and “other general government entities,” shown in the table above, is largely the result of this recharacterization.

Exchange of BTPs with the Bank of Italy. In 2002, the Ministry of Economy and Finance issued to the Bank of Italy €15.4 billion of BTPs with interest rates ranging from 5.0 per cent to 6.5 per cent and maturing between 2012 and 2031 in exchange for €39.4 billion of outstanding 1.0 per cent BTPs maturing between 2014 and 2044 issued in 1993. The average maturity of public debt decreased to 5.56 years at December 31, 2002 due principally to this bond exchange with the Bank of Italy on December 31, 2002.

Public Debt Management. Debt management continues to be geared towards lengthening the average maturity of public debt, which increased from 6.56 years at December 31, 2005 to 6.77 years at December 31, 2006.

The Government’s objectives with respect to the management of public debt are to minimize the cost of borrowing in the medium-term and to reduce the volatility of interest payments. In accordance with these objectives, the Treasury has, in the past, gradually increased the proportion of total Government bonds in circulation represented by fixed-rate securities and inflation indexed securities, which hedge exposure to movements in nominal interest rates, while reducing the proportion represented by floating rate and short-term securities, from approximately two-thirds to less than one third. The ratio of fixed-rate instruments to total government securities in the domestic market has stabilized to approximately 68 per cent, while the short-term and variable-rate component decreased from 35 per cent in 1999 to 27 per cent at the end of 2006. Italian government securities indexed to the Euro Area inflation rate (BTP€i) increased from 2003 to reach more than 5 per cent of the total Government bonds at the end of 2006.

The following table shows the total of debt securities issued by the Treasury and outstanding as of the dates indicated. Total Treasury issues differ from Italy’s total public debt as the former do not include liabilities to holders of postal savings accounts, debt incurred by Ferrovie dello Stato S.p.A. and ANAS S.p.A. (Azienda Nazionale Autonoma delle Strade) and debt incurred by other state sector entities, other general government entities and other liabilities reclassified as general Government debt pursuant to Eurostat rulings.

Total Treasury Issues


	March 30, 2007		June 30, 2007		September 30, 2007		December 31, 2007
	(Millions of euro)
Short term bonds (BOT)		143,250		142,750		146,150		128,302
Medium and long term bonds (initially issued in Italy)		1,057,735		1,086,771		1,089,725		1,080,785
External bonds (initially issued outside Italy)⁽¹⁾		74,920		77,404		71,394		69,314

Total Treasury issues		1,275,905		1,306,925		1,307,269		1,278,401


(1)		Italy often enters into currency swap agreements in the ordinary course of the management of its debt. The total amount of external bonds shown above takes into account the effect of these arrangements and is not directly comparable to the total amounts of external bonds indicated in the table “External Bonds of the Treasury as of December 31, 2006” and in the table “External Bonds of the Treasury as of December 31, 2007” below, which do not take into account: (i) the effect of currency swaps and (ii) the amount of bonds outstanding under Italy’s Commercial Paper Program.

Source: Ministry of Economy and Finance.

Summary of Internal Debt

Internal debt is debt initially incurred or issued in Italy, regardless of the currency of denomination. Italy’s total internal public debt as at December 31, 2006 was €1,483,023 million, an increase of €79.94 million from December 31, 2005. The following table summarizes the internal public debt as at December 31 in each of the years 2002 through 2006.

Internal Public Debt


	2002			2003			2004			2005			2006
	(Millions of euro)
Debt incurred by the Treasury:
Short Term Bonds (BOT)⁽¹⁾		113,740			119,645			118,750			117,806			122,780
Medium and Long Term Bonds
CTZ⁽²⁾		59,193			52,636			45,603			43,184			43,669
CCT⁽³⁾		215,470			197,540			197,435			198,663			190,824
of which:
Floating rate		215,470			197,540			197,435			198,663			190,824
BTP⁽⁴⁾		671,872			691,705			707,890			716,708			753,300
BTP€i⁽⁵⁾		10,203			28,578			48,034			60,933
Total		1,060,275			1,071,729			1,098,256			1,124,395			1,171,506
Postal bonds⁽⁶⁾		77,250			57,522			53,094			45,950			39,648
Postal accounts⁽⁶⁾		76,665			46,455			67,991			100,266			113,910
FS bonds and loans⁽⁷⁾		1,032			1,032			—			—			—
ANAS bonds and loans⁽⁸⁾		384			218			52			—			—
Other State sector entities⁽⁹⁾		8,485			40,881			40,505			38,056			43,985
Other general government entities⁽¹⁰⁾		49,458			79,483			84,243			94,419			113,974
Total internal public debt		1,273,549			1,297,320			1,344,141			1,403,085			1,483,023
Treasury accounts⁽¹¹⁾		(21,185	)		(13,048	)		(15,709	)		(14,535	)		(22,778	)
Total internal public debt net of Treasury account		1,252,364			1,284,272			1,328,432			1,388,550			1,460,245


(1)		BOTs (Buoni Ordinari del Tesoro) are short-term, zero-coupon notes with a maturity of three, six or 12 months.

(2)		CTZs (Certificati del Tesoro Zero-Coupon), introduced in 1995, are zero-coupon notes with maturities of eighteen or twenty-four months.

(3)		CCTs (Certificati di Credito del Tesoro) are medium- and long-term notes at a variable interest rate with a semiannual coupon.

(4)		BTPs (Buoni del Tesoro Poliennali) are medium- and long-term notes that pay a fixed rate of interest, with a semiannual coupon.

(5)		BTP€is (inflation-linked BTPs) are medium- and long-term notes with a semiannual coupon. Both the principal amount under the notes and the coupon are indexed to the euro-zone harmonized index of consumer prices, excluding tobacco.

(6)		“Postal Bonds” are long-term certificates that may be withdrawn by the account owner prior to maturity with nominal penalties, and “Postal Accounts,” are demand, short- and medium-term deposit accounts held by the private sector and by the Treasury on behalf of public companies, such as Fintecna S.p.A. and companies formed in connection with securitization transactions carried out by the Treasury. As of the date of conversion of CDP into a joint stock company in 2003, the Ministry of Economy and Finance assumed certain postal savings liabilities as described in greater detail above under “Debt — General.”

(7)		Includes FS bonds and other debt incurred by FS and assumed by the Treasury by law in 1996.

(8)		Includes ANAS bonds and other debt incurred by ANAS.

(9)		Includes loans and securities issued by the Institute of Credit for Public Works (CREDIOP) and certain other entities. All indebtedness included in this line item is net of Treasury securities owned by such entities.

(10)		All indebtedness included in this line has been treated as funded debt in this “Public Debt” section. A small portion, however, may have had a maturity at issuance of less than one year or may have been incurred or issued abroad. The increase in debt of “other general government entities” in 2003 was largely due to the conversion of CDP into a joint stock company in 2003, as described in greater detail above under “Debt — General.”

(11)		The line item “Treasury accounts” includes all the funds of the Treasury deposited with the Bank of Italy, including the sinking fund, supplied by privatizations. See “Monetary System — Monetary Policy.”

Source: Ministry of Economy and Finance.

The following table divides the internal public debt into floating debt and funded debt as at December 31 in each of the years 2002 through 2006. Floating debt is debt that has a maturity at issuance of less than one year. Funded debt is debt that has a maturity at issuance of one year or more.


	2002		2003		2004		2005		2006
	(Millions of euro)
Floating internal debt⁽¹⁾		121,656		95,099		114,741		146,073		160,191
Funded internal debt		1,151,893		1,202,221		1,229,400		1,257,012		1,322,832
Total internal public debt		1,273,549		1,297,320		1,344,141		1,403,085		1,483,023


(1)		Includes BOTs with a maturity at issuance of three and six months and postal accounts.

Source: Ministry of Economy and Finance.

Italy reduced the ratio of short-term bonds to total debt issued from 23.2 per cent in 1994 to 9.16 per cent in 2000. This ratio has remained stable at approximately 10 per cent in the five years to December 31, 2006.

Summary of External Debt

Eternal debt is debt initially incurred or issued outside Italy, regardless of the currency of denomination. Total external public debt as at December 31, 2006 was €92,417 million. The following table summarizes the external public debt as at December 31 in each of the years 2002 through 2006.


	2002		2003		2004		2005		2006
	(Millions of euro)
External Treasury Bonds⁽¹⁾		81,201		84,147		85,262		87,798		75,200
FS bonds and loans⁽²⁾		3,857		2,376		1,753		1,744		1,284
ISPA bonds and loans⁽³⁾		—		—		7,211		12,976		12,989
Other State sector entities		1,018		814		676		646		618
Other general government entities		7,544		7,723		4,352		4,948		2,326
Total external public debt		93,620		95,060		99,254		108,113		92,417


(1)		Italy often enters into currency swap agreements in the ordinary course of the management of its debt. The total amount of external bonds shown above takes into account the effect of these arrangements. All amounts of debt outstanding under Italy’s $10 billion Commercial Paper program are repaid in full every year by year-end.

(2)		Includes FS bonds and other debt incurred by FS outside Italy and assumed by the Treasury by law in 1996.

(3)		Includes ISPA’s bonds and other debt, guaranteed by the State, in connection with the financing of the high-speed railway link between Turin, Milan, Rome and Naples. For more information, see above under “—General.”

Source: Ministry of Economy and Finance.

The following table sets forth a breakdown of the external public debt of the Treasury, by currency, as at December 31 in each of the years 2002 through 2006. The amounts shown below are nominal values at issuance, before giving effect to currency swaps, and do not include external public debt of other state sector entities and other general government entities. Italy often enters into currency swap agreements in the ordinary course of the management of its debt.


	2002		2003		2004		2005		2006
	(Millions)
Euro⁽¹⁾		21,753		21,354		20,328		20,965		21,572
British Pounds		2,005		2,605		2,855		2,750		2,750
Swiss Francs		7,800		8,800		9,800		10,500		9,500
U.S. Dollars⁽²⁾		38,591		45,675		49,589		52,489		42,489
Japanese Yen		1,475,000		1,325,000		1,225,000		1,000,000		825,000
Norwegian Kroner		2,000		4,000		4,000		4,000		4,000
Australian Dollars		—		1,000		1,000		1,000


(1)		Does not include the amount of debt incurred in euros by ISPA and guaranteed by the State, which is shown in the previous table.

(2)		Includes US$989 million of debt originally incurred by FS.

Source: Ministry of Economy and Finance.

Although historically Italy has not relied heavily on external debt, the Treasury raised approximately US$68 billion by issuing bonds denominated in euro and currencies other than euros during the period 2002 through 2006. As of December 31, 2006, external debt accounted for approximately 5.9 per cent of total public debt, compared to 6.8 per cent at December 31, 2002. As of December 31, 2006, external Treasury bonds denominated in euro and those denominated in currencies other than euro accounted for 6.1 per cent and 0.7 per cent of total Treasury bonds, respectively.

Italy accesses the international capital market through a Global Bond Program registered under the United States Securities Act of 1933, a US$40 billion Medium-Term Note Program established in 1998 and a $10 billion Commercial Paper Program established in 1999. The Global Bond Program has been Italy’s principal source of funding from the international capital markets since 2001. Italy introduced collective action clauses (CACs) in the documentation of all New York law governed bonds issued after June 16, 2003.

External Bonds of the Treasury as of December 31, 2006

The following table shows the external bonds of the Treasury issued and outstanding as of December 31, 2006.


		Initial Public					Original Principal		Principal Amount		Equivalent
Currency / Amount	Interest Rate(%)	Offering Price			Date of Issue	Maturity Date	Amount		Outstanding		in euro
US$⁽¹⁾
$3,500,000,000	6.875%		98.725	%	September 27, 1993	September 27, 2023		3,500,000,000		3,500,000,000		2,657,555,049
$1,500,000,000	6.025%-6.88 %		100.00	%	March 5, 1996	Mar 5, 2004/12		1,500,000,000		1,500,000,000		1,138,952,164
$750,000,000	5.81%-6,70%		100.00	%	March 5, 1996	Mar 5, 2002/10		750,000,000		750,000,000		569,476,082
$1,500,000,000	5.97% -6.25%		100.00	%	December 20, 1996	Dec 20, 2004/12		1,500,000,000		1,500,000,000		1,138,952,164
$2,500,000,000	6.00%		99.755	%	May 29, 1998	May 29, 2008		2,500,000,000		2,500,000,000		1,898,253,607
$2,000,000,000	6.00%		99.274	%	February 22, 2001	February 22, 2011		2,000,000,000		2,000,000,000		1,518,602,885
$2,000,000,000	5.625%		99.893	%	March 1, 2002	June 15, 2012		2,000,000,000		2,000,000,000		1,518,602,885
$1,000,000,000	5.625%		99.392	%	May 8, 2002	June 15, 2012		1,000,000,000		1,000,000,000		759,301,443
$300,000,000	3 mth libor - 0.065%		100.00	%	August 1, 2002	August 1, 2007		300,000,000		300,000,000		227,790,433
$3,000,000,000	3.625%		99.721	%	September 4, 2002	September 4, 2007		3,000,000,000		3,000,000,000		2,277,904,328
$2,000,000,000	5.375%		98.436	%	February 27, 2003	June 15, 2033		2,000,000,000		2,000,000,000		1,518,602,885
$2,000,000,000	4.375%		99.694	%	February 27, 2003	June 15, 2013		2,000,000,000		2,000,000,000		1,518,602,885
$1,250,000,000	3.25%		99.949	%	May 6, 2003	May 6, 2008		1,250,000,000		1,250,000,000		949,126,803
$2,000,000,000	2.50%		99.521	%	July 3, 2003	July 15, 2008		2,000,000,000		2,000,000,000		1,518,602,885
$100,000,000	4.17%		100.00	%	November 14, 2003	November 15, 2010		100,000,000		100,000,000		75,930,144
$100,000,000	4.06%		100.00	%	December 9, 2003	December 9, 2010		100,000,000		100,000,000		75,930,144
$2,000,000,000	3.25%		99.515	%	March 3, 2004	May 15, 2009		2,000,000,000		2,000,000,000		1,518,602,885
$2,000,000,000	3.75%		99.783	%	June 30, 2004	December 14, 2007		2,000,000,000		2,000,000,000		1,518,602,885
$4,000,000,000	4.50%		99.411	%	January 21, 2005	January 21, 2015		4,000,000,000		4,000,000,000		3,037,205,771
$3,000,000,000	4.00%		99.932	%	May 9, 2005	June 16, 2008		3,000,000,000		3,000,000,000		2,277,904,328
$2,000,000,000	4.75%		99.34	%	January 25, 2006	January 25, 2016		2,000,000,000		2,000,000,000		1,518,602,885
$3,000,000,000	5.25%		99.85	%	September 20, 2006	September 20, 2016		3,000,000,000		3,000,000,000		2,277,904,328

Euro⁽²⁾
€2,500,000,000	9.25%		98.160	%	March 7, 1991	March 7, 2011		2,500,000,000		2,500,000,000		2,500,000,000
€1,022,583,762	3 mth libor+ 0.0625%		99.89	%	11-Dec-95	December 20, 2002/10		1,022,583,762		1,022,583,762		1,022,583,762
€567,225,000	6.125%		100.790	%	May 29, 1997	May 29, 2012		567,225,000		567,225,000		567,225,000
€762,245,000	5.875%		101.594	%	July 2, 1997	July 2, 2007		762,245,000		762,245,000		762,245,000
€1,533,870,000	5.750%		101.663	%	July 3,1997	July 10, 2007		1,534,000,000		1,534,000,000		1,534,000,000
€60,000,000	3 mth libor -16 b.p.		99.610	%	October 8, 1998	October 8, 2018		60,000,000		60,000,000		60,000,000
€300,000,000	Index linked		101.425	%	October 15, 1998	October 15, 2018		300,000,000		300,000,000		300,000,000
€1,000,000,000	4.00%		99.95	%	May 6, 1999	May 6, 2019		1,000,000,000		1,000,000,000		1,000,000,000
€1,000,000,000	frn 30Y		101.60	%	June 28, 1999	June 28, 2029		1,000,000,000		905,000,000		905,000,000
€1,000,000,000	t.swap 30 – 0.91%		100.75	%	August 30, 1999	August 30, 2019		1,000,000,000		1,000,000,000		1,000,000,000
€150,000,000	Zero Coupon		100.00	%	February 20, 2001	February 20, 2031		150,000,000		150,000,000		150,000,000
€3,000,000,000	5.75%		100.04	%	July 25, 2001	July 25, 2016		3,000,000,000		3,000,000,000		3,000,000,000
€400,000,000	3 mth libor - 0.06%		100.00	%	January 22, 2002	January 22, 2012		400,000,000		400,000,000		400,000,000
€1,000,000,000	3 mth eubor - 0.06%		100.00	%	July 24, 2003	January 24, 2007		1,000,000,000		1,000,000,000		1,000,000,000
€150,000,000	84.5% cms 10Y		100.00	%	April 26, 2004	April 26, 2019		150,000,000		150,000,000		150,000,000
€300,000,000	12 mth eubor + 0.10%		100.00	%	May 31, 2005	May 31, 2035		300,000,000		300,000,000		300,000,000
€720,000,000	3.546% until 2009		100.00	%	June 2, 2005	June 2, 2029		720,000,000		720,000,000		720,000,000
€395,000,000	3.523% until 2010		100.00	%	June 2, 2005	June 2, 2030		395,000,000		395,000,000		395,000,000
€200,000,000	85% * 10y Eurswap		100.00	%	June 8, 2005	June 8, 2020		200,000,000		200,000,000		200,000,000
€2,500,000,000	85% * 10y swap rate		100.00	%	June 15, 2005	June 15, 2020		2,500,000,000		2,500,000,000		2,500,000,000
€300,000,000	85.5% * 10y swap rate		100.00	%	June 28, 2005	June 28, 2021		300,000,000		300,000,000		300,000,000
€200,000,000	6 mth Eubor + 1.5% (max 10x(cms10-cms2)		100.00	%	November 9, 2005	November 9, 2025		200,000,000		200,000,000		200,000,000
€900,000,000	6 mth Eubor + 0.04%		99.38357	%	March 17, 2006	March 17, 2021		900,000,000		900,000,000		900,000,000
€1,000,000,000	6 mth Eubor + 0.60%		99.85	%	March 22, 2006	March 22, 2018		1,000,000,000		1,000,000,000		1,000,000,000
€192,000,000	Zero Coupon		100.00	%	March 28, 2006	March 28, 2036		192,000,000		192,000,000		192,000,000
€300,000,000	6 mth Eubor + 0.075%		100.00	%	March 30, 2006	March 30, 2026		300,000,000		300,000,000		300,000,000
€215,000,000	5.07%/ 10y cms		100.00	%	May 11, 2006	May 11, 2026		215,000,000		215,000,000		215,000,000

Swiss Francs⁽³⁾
ChF1,000,000,000	3.50%		102.90	%	September 25, 1998	September 25, 2008		1,000,000,000		1,000,000,000		622,316,261
ChF1,500,000,000	3.125%		99.825	%	Jan 15,1999	July 15, 2010		1,500,000,000		1,500,000,000		933,474,392
ChF1,000,000,000	2.00%		100.47	%	January 30, 2003	April 30, 2009		1,000,000,000		1,000,000,000		622,316,261
ChF1,000,000,000	2.00%		99.775	%	August 11, 2003	February 9, 2007		1,000,000,000		1,000,000,000		622,316,261
ChF1,000,000,000	1.75%		100.09	%	February 3, 2004	March 3, 2008		1,000,000,000		1,000,000,000		622,316,261
ChF1,000,000,000	2.75%		100.625	%	July 1, 2004	July 1, 2011		1,000,000,000		1,000,000,000		622,316,261
ChF2,000,000,000	2.50%		100.09	%	February 2, 2005	March 2, 2015		2,000,000,000		2,000,000,000		1,244,632,522
ChF1,000,000,000	2.50%		99.336	%	January 30, 2006	January 30, 2018		1,000,000,000		1,000,000,000		622,316,261

Pounds Sterling⁽⁴⁾
£400,000,000	10.50%		100.875	%	April 28, 1989	April 30, 2014		400,000,000		400,000,000		595,681,310
£1,500,000,000	6.00%		98.565	%	August 4, 1998	August 4, 2028		1,500,000,000		1,500,000,000		2,233,804,914
£600,000,000	3mth libor - 0.15%		100.00	%	March 5, 2003	March 5, 2008		600,000,000		600,000,000		893,521,966
£250,000,000	5.25%		99.476	%	July 29, 2004	December 7, 2034		250000000		250000000		372,300,819

Norwegian Kroners⁽⁵⁾
NOK 2,000,000,000	6.15%		100.00	%	September 25, 2002	September 25, 2012		2,000,000,000		2,000,000,000		242,777,373
NOK 2,000,000,000	4.34%		100.00	%	June 23, 2003	June 23, 2015		2,000,000,000		2,000,000,000		242,777,373

Japanese Yen⁽⁶⁾
¥125,000,000,000	5.50%		100.00	%	December 15, 1994	December 15, 2014		125,000,000,000		125,000,000,000		796,533,486
¥125,000,000,000	4.50%		100.00	%	June 8, 1995	June 8, 2015		125,000,000,000		125,000,000,000		796,533,486
¥150,000,000,000	3.80%		100.00	%	April 4, 1996	March 27, 2008		150,000,000,000		150,000,000,000		955,840,184


		Initial Public					Original Principal		Principal Amount		Equivalent
Currency / Amount	Interest Rate(%)	Offering Price			Date of Issue	Maturity Date	Amount		Outstanding		in euro
US$⁽¹⁾
¥100,000,000,000	3.70%		100.00	%	November 14, 1996	November 14, 2016		100,000,000,000		100,000,000,000		637,226,789
¥100,000,000,000	3.450%		99.80	%	March 24, 1997	March 24, 2017		100,000,000,000		100,000,000,000		637,226,789
¥100,000,000,000	1.80%		99.882	%	February 23, 2000	February 23, 2010		100,000,000,000		100,000,000,000		637,226,789
¥100,000,000,000	0.65%		99.995	%	April 14, 2004	March 20, 2009		100,000,000,000		100,000,000,000		637,226,789
¥25,000,000,000	2.87%		100.00	%	May 18, 2006	May 18, 2036		25,000,000,000		25,000,000,000		159,306,697

Australian $
A$1,000,000,000	5.88%		99.803	%	February 27, 2004	August 14, 2008		1,000,000,000		1,000,000,000		599,125,277


TOTAL OUTSTANDING												69,433,178,156	⁽⁸⁾


(1)		U.S. dollar amounts have been converted into euro at $1.317/€1.00, the exchange rate prevailing at December 29, 2006.

(2)		External debt denominated in currencies of countries that have adopted the euro have been converted into euro at the fixed rate at which those currencies where converted into euro upon their issuing countries becoming members of the European Monetary Union.

(3)		Swiss Franc amounts have been converted into euro at ChF1.6069/€1.00, the exchange rate prevailing at December 29, 2006.

(4)		Pounds Sterling amounts have been converted into euro at £0.6715/€1.00, the exchange rate prevailing at December 29, 2006.

(5)		Norwegian Kroner amounts have been converted into euro at NOK8.238/€1.00, the exchange rate prevailing at December 29, 2006.

(6)		Japanese Yen amounts have been converted into euro at ¥156.93/€1.00, the exchange rate prevailing at December 29, 2006.

(7)		Australian Dollar amounts have been converted into euro at A$1.6691/€1.00, the exchange rate prevailing at December 29, 2006.

(8)		The amount of external bonds shown above does not take into account the effect of currency swaps that Italy often enters into in the ordinary course of the management of its debt. The following table summarizes the effects on the Treasury’s external bonds after giving effect to currency swaps.


	As of December 31, 2006
Currency	Before Swap			After Swap
US Dollars		45.38	%		3.79	%
Euro		31.07	%		88.72	%
Swiss Francs		8.51	%		3.00	%
Pounds Sterling		5.90	%		2.38	%
Norwegian Kroner		0.70	%		—
Japanese Yen		7.57	%		2.12	%
Australian Dollars		0.86	%		—
Total External Bonds (in millions of Euro)		69,433,178,156			75,199,901,712


Source:		Ministry of Economy and Finance.

External Bonds of the Treasury as of December 31, 2007

The following table shows the external bonds of the Treasury issued and outstanding as of December 31, 2007.


		Initial Public					Original Principal		Principal Amount		Equivalent
Currency / Amount	Interest Rate(%)	Offering Price			Date of Issue	Maturity Date	Amount		Outstanding		in euro
US$⁽¹⁾
$3,500,000,000	6.875%		98.725	%	September 27, 1993	September 27, 2023		3,500,000,000		3,500,000,000		2,377,555,873
$1,500,000,000	6.025%-6.88 %		100.00	%	March 5, 1996	Mar 5, 2004/12		1,500,000,000		1,500,000,000		1,018,952,517
$750,000,000	5.81%-6,70%		100.00	%	March 5, 1996	Mar 5, 2002/10		750,000,000		750,000,000		509,476,258
$1,500,000,000	5.97% -6.25%		100.00	%	December 20, 1996	Dec 20, 2004/12		1,500,000,000		1,500,000,000		1,018,952,517
$2,500,000,000	6.00%		99.755	%	May 29, 1998	May 29, 2008		2,500,000,000		2,500,000,000		1,698,254,195
$2,000,000,000	6.00%		99.274	%	February 22, 2001	February 22, 2011		2,000,000,000		2,000,000,000		1,358,603,356
$2,000,000,000	5.625%		99.893	%	March 1, 2002	June 15, 2012		2,000,000,000		2,000,000,000		1,358,603,356
$1,000,000,000	5.625%		99.392	%	May 8, 2002	June 15, 2012		1,000,000,000		1,000,000,000		679,301,678
$2,000,000,000	5.375%		98.436	%	February 27, 2003	June 15, 2033		2,000,000,000		2,000,000,000		1,358,603,356
$2,000,000,000	4.375%		99.694	%	February 27, 2003	June 15, 2013		2,000,000,000		2,000,000,000		1,358,603,356
$1,250,000,000	3.25%		99.949	%	May 6, 2003	May 6, 2008		1,250,000,000		1,250,000,000		849,127,097
$2,000,000,000	2.50%		99.521	%	July 3, 2003	July 15, 2008		2,000,000,000		2,000,000,000		1,358,603,356
$100,000,000	4.17%		100.00	%	November 14, 2003	November 15, 2010		100,000,000		100,000,000		67,930,168
$100,000,000	4.06%		100.00	%	December 9, 2003	December 9, 2010		100,000,000		100,000,000		67,930,168
$2,000,000,000	3.25%		99.515	%	March 3, 2004	May 15, 2009		2,000,000,000		2,000,000,000		1,358,603,356
$4,000,000,000	4.50%		99.411	%	January 21, 2005	January 21, 2015		4,000,000,000		4,000,000,000		2,717,206,712
$3,000,000,000	4.00%		99.932	%	May 9, 2005	June 16, 2008		3,000,000,000		3,000,000,000		2,037,905,034
$2,000,000,000	4.75%		99.34	%	January 25, 2006	January 25, 2016		2,000,000,000		2,000,000,000		1,358,603,356
$3,000,000,000	5.25%		99.85	%	September 20, 2006	September 20, 2016		3,000,000,000		3,000,000,000		2,037,905,034
$2,000,000,000	5.375%		99.367	%	June 12, 2007	June 12, 2017		2,000,000,000		2,000,000,000		1,358,603,356

Euro⁽²⁾
€2,500,000,000	9.25%		98.160	%	March 7, 1991	March 7, 2011		2,500,000,000		2,500,000,000		2,500,000,000
€1,022,583,762	3 mth libor+ 0.0625%		99.89	%	11-Dec-95	December 20, 2002/10		1,022,583,762		1,022,583,762		1,022,583,762
€567,225,000	6.25%		100.790	%	May 29, 1997	May 29, 2012		567,225,000		567,225,000		567,225,000
€60,000,000	libor 3m – 16 b.p.		99.610	%	October 8, 1998	October 8, 2018		60,000,000		60,000,000		60,000,000
€300,000,000	Index linked		101.425	%	October 15, 1998	October 15, 2018		300,000,000		300,000,000		300,000,000
€1,000,000,000	4.00%		99.95	%	May 6, 1999	May 6, 2019		1,000,000,000		1,000,000,000		1,000,000,000
€1,000,000,000	frn 30Y		101.60	%	June 28, 1999	June 28, 2029		1,000,000,000		905,000,000		905,000,000
€1,000,000,000	t.swap 30 – 0.91%		100.75	%	August 30, 1999	August 30, 2019		1,000,000,000		1,000,000,000		1,000,000,000
€150,000,000	Zero Coupon		100.00	%	February 20, 2001	February 20, 2031		150,000,000		150,000,000		150,000,000
€3,000,000,000	5.75%		100.04	%	July 25, 2001	July 25, 2016		3,000,000,000		3,000,000,000		3,000,000,000
€400,000,000	3 mth libor - 0.06%		100.00	%	January 22, 2002	January 22, 2012		400,000,000		400,000,000		400,000,000
€150,000,000	84.5% cms 10Y		100.00	%	April 26, 2004	April 26, 2019		150,000,000		150,000,000		150,000,000
€300,000,000	12 mth eubor + 0.10%		100.00	%	May 31, 2005	May 31, 2035		300,000,000		300,000,000		300,000,000
€720,000,000	3.546% until 2009		100.00	%	June 2, 2005	June 2, 2029		720,000,000		720,000,000		720,000,000
€395,000,000	3.523% until 2010		100.00	%	June 2, 2005	June 2, 2030		395,000,000		395,000,000		395,000,000
€200,000,000	85% * 10y Eurswap		100.00	%	June 8, 2005	June 8, 2020		200,000,000		200,000,000		200,000,000
€2,500,000,000	85% * 10y swap rate		100.00	%	June 15, 2005	June 15, 2020		2,500,000,000		2,500,000,000		2,500,000,000
€300,000,000	85.5% * 10y swap rate		100.00	%	June 28, 2005	June 28, 2021		300,000,000		300,000,000		300,000,000
€200,000,000	6 mth Eubor + 1.5% (max 10x(cms10-cms2)		100.00	%	November 9, 2005	November 9, 2025		200,000,000		200,000,000		200,000,000
€900,000,000	6 mth Eubor + 0.04%		99.38357	%	March 17, 2006	March 17, 2021		900,000,000		900,000,000		900,000,000
€1,000,000,000	6 mth Eubor + 0.60%		99.85	%	March 22, 2006	March 22, 2018		1,000,000,000		1,000,000,000		1,000,000,000
€192,000,000	Zero Coupon		100.00	%	March 28, 2006	March 28, 2036		192,000,000		192,000,000		192,000,000
€300,000,000	6 mth Eubor + 0.075%		100.00	%	March 30, 2006	March 30, 2026		300,000,000		300,000,000		300,000,000
€215,000,000	5.07%/ 10y cms		100.00	%	May 11, 2006	May 11, 2026		215,000,000		215,000,000		215,000,000
€1,026,000,000	1.85% linked to EU inflation index		99.796065	%	January 5, 2007	September 15, 2057		1,026,000,000		1,026,000,000		1,026,000,000
€257,000,000	2.00% linked to EU inflation index		99.02385	%	March 30, 2007	September 15, 2062		257,000,000		257,000,000		257,000,000
€160,000,000	4.49%		%99.86	%	April 5, 2007	April 5, 2027		160,000,000		160,000,000		160,000,000

Swiss Francs⁽³⁾
ChF 1,000,000,000	3.50%		102.90	%	September 25, 1998	September 25, 2008		1,000,000,000		1,000,000,000		604,339,155
ChF 1,500,000,000	3.125%		99.825	%	January 15,1999	July 15, 2010		1,500,000,000		1,500,000,000		906,508,733
ChF 1,000,000,000	2.00%		100.47	%	January 30, 2003	April 30, 2009		1,000,000,000		1,000,000,000		604,339,155
ChF 1,000,000,000	1.75%		100.09	%	February 3, 2004	March 3, 2008		1,000,000,000		1,000,000,000		604,339,155
ChF 1,000,000,000	2.75%		100.625	%	July 1, 2004	July 1, 2011		1,000,000,000		1,000,000,000		604,339,155
ChF 2,000,000,000	2.50%		100.09	%	February 2, 2005	March 2, 2015		2,000,000,000		2,000,000,000		1,208,678,310
ChF 1,000,000,000	2.50%		99.336	%	January 30, 2006	January 30, 2018		1,000,000,000		1,000,000,000		604,339,155

Pounds Sterling⁽⁴⁾
£400,000,000	10.50%		100.875	%	April 28, 1989	April 30, 2014		400,000,000		400,000,000		545,442,149
£1,500,000,000	6.00%		98.565	%	August 4, 1998	August 4, 2028		1,500,000,000		1,500,000,000		2,045,408,059
£600,000,000	3mth libor - 0.15%		100.00	%	March 5, 2003	March 5, 2008		600,000,000		600,000,000		818,163,224
£250,000,000	5.25%		99.476	%	July 29, 2004	December 7, 2034		250000000		250000000		340,901,343

Norwegian Kroners⁽⁵⁾
NOK 2,000,000,000	6.15%		100.00	%	September 25, 2002	September 25, 2012		2,000,000,000		2,000,000,000		251,319,427
NOK 2,000,000,000	4.34%		100.00	%	June 23, 2003	June 23, 2015		2,000,000,000		2,000,000,000		251,319,427

Japanese Yen⁽⁶⁾
¥125,000,000,000	5.50%		100.00	%	December 15, 1994	December 15, 2014		125,000,000,000		125,000,000,000		757,897,290
¥125,000,000,000	4.50%		100.00	%	June 8, 1995	June 8, 2015		125,000,000,000		125,000,000,000		757,897,290
¥150,000,000,000	3.80%		100.00	%	April 4, 1996	March 27, 2008		150,000,000,000		150,000,000,000		909,476,748
¥100,000,000,000	3.70%		100.00	%	November 14, 1996	November 14, 2016		100,000,000,000		100,000,000,000		606,317,832
¥100,000,000,000	3.450%		99.80	%	March 24, 1997	March 24, 2017		100,000,000,000		100,000,000,000		606,317,832
¥100,000,000,000	1.80%		99.882	%	February 23, 2000	February 23, 2010		100,000,000,000		100,000,000,000		606,317,832


		Initial Public					Original Principal		Principal Amount		Equivalent
Currency / Amount	Interest Rate(%)	Offering Price			Date of Issue	Maturity Date	Amount		Outstanding		in euro
¥100,000,000,000	0.65%		99.995	%	April 14, 2004	March 20, 2009		100,000,000,000		100,000,000,000		606,317,832
¥25,000,000,000	2.87%		100.00	%	May 18, 2006	May 18, 2036		25,000,000,000		25,000,000,000		151,579,458

Australian $⁽⁷⁾
A$1,000,000,000	5.88%		99.803	%	February 27, 2004	August 14, 2008		1,000,000,000		1,000,000,000		596,765,531

Czech Koruna(8) CZK2,490,000,000	4.36%		100.00	%	October 3, 2007	October 3, 2017		2,490,000,000		2,490,000,000		93,510,590
CZK2,490,000,000	4.40%		100.00	%	October 3, 2007	October 3, 2019		2,490,000,000		2,490,000,000		93,510,590
CZK2,490,000,000	4.41%		100.00	%	October 3, 2007	October 3, 2019		2,490,000,000		2,490,000,000		93,510,590


TOTAL OUTSTANDING												60,904,988,718	⁽⁹⁾


(1)		U.S. dollar amounts have been converted into euro at $1.4721/€1.00, the exchange rate prevailing at December 31, 2007.

(2)		External debt denominated in currencies of countries that have adopted the euro have been converted into euro at the fixed rate at which those currencies where converted into euro upon their issuing countries becoming members of the European Monetary Union.

(3)		Swiss Franc amounts have been converted into euro at ChF1.6547/€1.00, the exchange rate prevailing at December 31, 2007.

(4)		Pounds Sterling amounts have been converted into euro at £0.73335/€1.00, the exchange rate prevailing at December 31, 2007.

(5)		Norwegian Kroner amounts have been converted into euro at NOK7.958/€1.00, the exchange rate prevailing at December 31, 2007.

(6)		Japanese Yen amounts have been converted into euro at ¥164.93/€1.00, the exchange rate prevailing at December 31, 2007.

(7)		Australian Dollar amounts have been converted into euro at A$1.6757/€1.00, the exchange rate prevailing at December 31, 2007.

(8)		Czech Koruna amounts have been converted into euro at CZK26.628/€1.00, the exchange rate prevailing at December 31, 2007.

(9)		The amount of external bonds shown above does not take into account the effect of currency swaps that Italy often enters into in the ordinary course of the management of its debt. The following table summarizes the effects on the Treasury’s external bonds after giving effect to currency swaps.


	As of December 31, 2007
Currency	Before Swap			After Swap
US Dollars		42.61	%		2.21	%
Euro		32.32	%		97.79
Swiss Francs		8.43	%		—
Pounds Sterling		6.16	%		—
Norwegian Kroner		0.83	%		—
Japanese Yen		8.21	%		—
Australian Dollars		0.98	%		—
Czech Koruna		0.45	%		—
Total External Bonds (in millions of Euro)		60,904,988,718			69,313,992,698


Source:		Ministry of Economy and Finance.


	Yearly Average Rate⁽¹⁾ per €1.00
	2002		2003		2004		2005		2006		2007
Japanese Yen		118.0825		131.7558		134.44		136.85		146.02		161.25
British Pound		0.6298		0.6934		0.6786		0.6838		0.6817		0.6843
Swiss Franc		1.4660		1.5236		1.5438		1.5483		1.5729		1.6427


	2002		2003		2004		2005		2006
			(Millions of euro)
Gold		25,764		26,042		25,348		34,279		38,050
SDRs⁽¹⁾		103		123		106		194		206
Total position with IMF		3,726		3.289		2,719		1,490		742
Net foreign exchange		23,447		20,634		17,628		19,944		18,537
Total reserves		53,040		50,088		45,801		55,907		57,535


The 2008-2011 Program Document			71
Revenues and Expenditures			73
Expenditures			75
Revenues			79
Government Enterprises			81
Privatization Program			81
Government Real Estate Disposal Program			84
Public Debt			85
Summary of External Debt			90
Debt Service			92
Debt Record			92
Tables and Supplementary Information			93

	•		Cyprus, Estonia, Latvia, Luxembourg and Slovenia each have 4 votes; and

	•		Malta has 3 votes.

	•		a majority of member states (in certain cases, a two-thirds majority of member states) approve the decision; and

	•		a number of votes representing at least 73.9% of all votes is cast in favor of the decision.

	•		it shares with the Council the power to adopt directives, regulations and decisions.

	•		it shares budgetary authority with the Council, and can therefore influence EU spending.

	•		it approves the nomination of EU Commissioners, has the right to censure the EU Commission and exercises political supervision over all the EU institutions.


	2007-2009
Austria		18
Belgium		24
Bulgaria		18
Cyprus		6
Czech Republic		24
Denmark		14
Estonia		6
Finland		14
France		78
Germany		99
Greece		24
Hungary		24
Ireland		13
Italy		78
Latvia		9
Lithuania		13
Luxembourg		6
Malta		5
Netherlands		27
Poland		54
Portugal		24
Romania		35
Slovakia		14
Slovenia		7
Spain		54
Sweden		19
United Kingdom		78

Total		785


⁽¹⁾		The cost of living index reflects the change in price of a basket of goods and services (net of tobacco) typically purchased by non-farming families headed by an employee. It differs from the harmonized consumer price index in that the cost of living index is smaller in scope.

⁽²⁾		In accordance with European Commission regulations, since January 2002 the harmonized consumer price index reflects reductions in prices (e.g. seasonal sales and promotional offers) taking place for a minimum period of 15 days (formerly 30 days). As a consequence, figures for 2002 are not directly comparable to previous data.

⁽³⁾		The basket of goods and services used to measure the core inflation index is equivalent to the harmonized consumer price index basket less energy, unprocessed food, alcohol and tobacco products.

⁽⁴⁾		Unit labor costs are per capita wages reduced by productivity gains.


(1)		The Statistical Office of the European Communities, or Eurostat, published in July 2002 a decision relating to the methods of accounting for securitizations. Pursuant to the Eurostat decision, Italy is required to account for receipts, aggregating approximately €6.7 billion, from certain real estate and state lottery proceeds securitizations transactions, which took place in 2001, in the three-year period 2002-2004 and not in 2001. The general government revenues and expenditures figures presented in the table above take into account the effects of the Eurostat decision.

(2)		Includes revenues from the disposal of state-owned real estate (deducted from capital expenditures) for the year 2002 (€10,800 million), 2003 (€2,700 million), 2004 (€4,500 million), 2005 (€3,200 million) and 2006 (€1,400 million).

	•		Italy’s privatization program, through which, based on Treasury data, from February 1994 to December 2005, the Government raised approximately €94,5 billion (including revenues from the IRI disposal program), making the Italian privatization program one of the largest in Europe (privatization receipts were insignificant in 2006 and 2007);

	•		in the second half of the 1990s, the growth of Italy’s primary balance and a reduction in Italy’s interest expense;

	•		certain securitization transactions, which resulted in receipts of €44.7 billion in the period from 1999 to 2006;


								2015
	2007		2008		2009-2014			and after
	(Millions)
Euro		3,296		—		5,490	¹		22,276	⁽¹⁾
British Pounds		—		600		400			1,750
Swiss Francs		1,000		2,000		3,500			3,000
U.S. Dollars		5,300		8,750		13,939	²		14,500
Japanese Yen		—		150,000		325,000			350,000
Norwegian Kroner		—		—		2,000			2,000
Australian Dollars		—		1,000		—			—


(1)		Includes part of the amount of debt incurred by ISPA and guaranteed by the State.

(2)		Includes US$989 million of debt originally incurred by FS.


(1)		Floating debt is debt that has a maturity at issuance of less than one year. Funded debt is debt that has a maturity at issuance of one year or more.