Market worries shift from Greece to Italy - Pressure mounts on Berlusconi to quit

Italy became the latest target in Europe's financial crisis Monday, as soaring borrowing rates intensified pressure on Premier Silvio Berlusconi to resign and let a new government reform the country's spendthrift ways.

Berlusconi batted away reports that he was considering stepping down in favour of early elections, saying they were "without foundation".

But the prospect of financial disaster was real because of Italy's huge debts and slow growth.

In Athens, rival Greek political parties were hammering out a historic power-sharing deal Monday to secure a €130 billion (US$179 billion) rescue package, but markets remained wary and European leaders kept up pressure by holding back a vital bailout loan.

Socialist Prime Minister George Papandreou and conservative leader Antonis Samaras, former college roommates in the US, held fresh negotiations on the telephone Monday, hours after reaching the landmark agreement to form a coalition for the next 15 weeks.

The new administration's main job will be passing the new bailout package - agreed by international creditors on October 27 - before holding early elections.

Unlike Greece, Ireland and Portugal - the three countries that Europe has already bailed out - Italy's economy could be too large to rescue.

Investors want the government to quickly pass measures to boost growth and cut debt. But defections from Berlusconi's coalition government mean he no longer commands enough loyalty to pass the reforms.

The ultimate fear is that Italy cannot pay for its €1.9 trillion (US$2.6 trillion) debt and needs international help. The debt stands near 120 per cent of GDP.

The yield on Italy's 10-year bonds jumped another 0.42 of a percentage point Monday to 6.67 per cent, its highest level since the euro was established in 1999. That is drawing uncomfortably near the 7.0 per cent threshold that forced both Ireland and Portugal to accept bailouts.

As yields rise, governments must devote more of their national budgets simply to paying interest costs, creating a vicious circle of debt.

When traders thought early Monday that Berlusconi might resign, those borrowing rates eased. But later in the day, when it was clear the 75-year-old would not leave willingly, rates shot up again, reflecting market fears that he is not the leader who can turn Italy around.

Berlusconi's Facebook page said "the reports of my resignation are without foundation".

Only the loss of a confidence vote can force a government to resign. Opposition leader Pierluigi Bersani said lawmakers are planning exactly that.

Italy's reform measures include a plan to sell government assets - expected to raise €5 billion (US$6.9 billion) a year for three years - and tax breaks to reduce youth unemployment of 29 per cent and to get women back into the work force in a country where just 48 per cent of women have jobs. The legislation would also allow stores to stay open on Sundays and open up closed professions.

Berlusconi has also pledged to raise the retirement age to 67 for all to match European trends, despite the fierce resistance of his allies in the Northern League on whom Berlusconi relies to govern.

In Athens, Papandreou was expected to resign later Monday.

German Chancellor Angela Merkel reacted warily to Athens' latest political drama.

"Europe, and the German government too, must be able to see that the Greeks are serious, that it is not just about announcements but about actions," Merkel spokesman Steffen Seibert said.

Greece has survived since May 2010 on a €110 billion (US$150 billion) rescue-loan programme from eurozone partners and the IMF, but all agree it's not enough. A second rescue package has been created in which private bondholders have agreed to cancel 50 per cent of their Greek debt.

Frustrated with Greece's political disagreements, the country's creditors have frozen the next critical €8 billion (US$11 billion) loan installment until Greece formally approves the new debt deal.

The Greek government has said it could go bankrupt within weeks without the money.