Blow to Berlusconi in debt-crisis shake-up

Europe's debt crisis struck at the ancient capitals of Rome and Athens on Tuesday.

Italian Prime Minister Silvio Berlusconi, bloodied by a key vote, signalled he would resign, and Greek politicians said they were close to agreeing on a new government to lead their country through painful cutbacks.

Wealthier European countries including Germany and France have already bailed out struggling Greece, Ireland and Portugal, and Greece will get another euro100 billion (US$138 billion) of debt relief as soon as it resolves its political crisis, including a Prime Minister George Papandreou.

Berlusconi promised Tuesday to resign after parliament passes economic reforms demanded by the European Union, capping a two-decade political career that has ended with Italy on the brink of being swept into Europe's debt crisis.

Berlusconi met for about an hour Tuesday evening with Italian President Giorgio Napolitano after the premier lost his parliamentary majority during a routine vote earlier Tuesday.

PM to resign soon

In a statement, Napolitano's office said Berlusconi had "understood the implications of the vote" and promised during the meeting to resign once parliament passes economic reforms designed to spur growth and rein in Italy's public debt.

A vote on the measures is planned for next week.

Italy's borrowing rates spiked Tuesday to their highest level since the euro was established in 1999.

The yield on Italy's ten-year bonds was up 0.24 percentage point at 6.77 per cent. A rate of over 7.0 per cent is considered unsustainable and proved to be the trigger point that forced Greece, Portugal and Ireland into accepting financial bailouts.

The president's office said that once Berlusconi resigns, Napolitano would begin political consultations to form a new government.

The most widely discussed name to lead a technical government is Mario Monti, the former EU competition commissioner. The statement made no mention of the possibility of early elections.

The developments capped a convulsive day in the markets and in Italy's political circles after parliament approved the 2010 state accounts, but dealt Berlusconi a withering blow by revealing that he no longer commands enough support to govern.

Tuesday's vote garnered 308 votes of approval and none against in the Chamber of Deputies. But 321 deputies abstained from voting - most from the opposition centre-left - a tactic that laid bare Berlusconi's shrinking hold.

Berlusconi's margin was eight shy of the 316 votes he needs to claim an overall majority in the 630-member chamber.

"This government does not have the majority!" thundered opposition leader Pierluigi Bersani after the vote. "If you have a crumb of sense in front of Italy, give your resignation."

As Bersani spoke, Berlusconi scribbled his options on a piece of paper. An AP photo showed he wrote "resignation" and also "eight traitors," an apparent reference to former allies who had abstained.

Too big to bail out

Italy is the Eurozone's third-largest economy, with debts of around €1.9 trillion (US$2.6 trillion). Representing 17 per cent of the eurozone's gross domestic product, it is considered too big for Europe to bail out like Greece, Portugal and Ireland already have been.

Even worse, a substantial part of Italy's debt needs to be rolled over in the next few years — the nation needs to raise €300 billion (US$412 billion) in 2012 alone — just as interest rates for it to borrow have been soaring.

Berlusconi last week took the humiliating step of asking the International Monetary Fund to monitor the country's reform efforts in a bid to reassure markets. On Wednesday, a separate European Union monitoring mission is to begin work in Rome to review measures taken so far.

The EU's questionnaire put to Italy ahead of the mission says "additional measures" will be needed beyond what Italy has pledged to do, to balance the budget by 2013, according to the text shown on Italy's Sky TG24.

"The economic and financial situation of Italy is very worrying and we want to help Italy through our rigorous surveillance," said EU Monetary Affairs Commissioner Olli Rehn.

Business leaders once enthusiastically backed the media mogul's leadership, but now some say Berlusconi's government has failed to revive Italy's stalled economy.