Italian Prime Minister Mario Monti expressed serious concern on Tuesday over a possible default by Sicily, an autonomous region long criticized for its wasteful public administration and bloated government payroll.
Mr. Monti said in a statement that there were "grave concerns" that the southern island could default and he said he had written to Governor Raffaele Lombardo seeking confirmation that he would resign by the end of the month.
The highly unusual intervention from the Prime Minister underscored the gravity of the situation in Sicily, which accounts for around 5.5 per cent of Italy's gross domestic product and has an unemployment rate of 19.5 per cent, almost twice the national level.
After a decade of steady deterioration in its finances, the island has some €5.3-billion ($6.6-billion) in debt, a record of waste and inefficiency, and an outsized public service that critics say is used by local politicians to buy votes.
Mr. Monti said that if the government in Rome is to help bail out Sicily, he would have to take account of the situation of the regional government. He is due to meet Mr. Lombardo on July 24.
Sicilian authorities have been severely criticized by the Corte dei Conti, Italy's main public finance audit body, which warned last month that its chronically strained public finances were in a position of "difficult sustainability."
Despite its debt burden, the region still took on thousands of new staff last year, increasing the number of permanent regional employees by more than 30 per cent to 17,218.
Of these, 1,905 or about 11 per cent of the total were in management positions, around double the ratio of other regions.
The Corte dei Conti said in its report on the 2011 accounts that the region's hiring procedure "could not fail to give rise to some perplexity."
Despite the worry over its finances, Sicily is not expected to pose a major threat to Italy's overall public finances and credit agency Fitch said it saw no immediate risk it would fail to meet its commitments.
"As far as we know, the region of Sicily is not in the best of financial conditions. But it's not on the verge of an imminent default on its loans and bonds," said Raffaele Carnevale, senior director for international public finance.
Fitch rates Sicily triple-B-plus with a negative outlook, one notch below Italy's sovereign debt rating. The debt of Sicily and other local authorities amount to around €115-billion, contributing to Italy's huge €2-trillion public debt.
Mr. Monti's comments nonetheless sent the prices of German bonds higher as jittery markets absorbed the latest signs of strain in the euro zone's third-largest economy, which has returned firmly to the forefront of the euro zone debt crisis.
Borrowing costs on Italy's benchmark 10-year debt is above 6 per cent and the risk premium or spread over German bonds is almost 4.8 percentage points.
The Corte dei Conti noted that Sicily's tax estimates had been "excessively optimistic" and had fallen by almost 12 per cent from the previous year as the recession bit.
In other areas, health spending, one of the main responsibilities of the regional governments, rose more than 7 per cent last year to €9.4-billion.