Italy's borrowing rates at danger point

Italy's key borrowing rate spiked Wednesday well above the seven per cent level that eventually forced other Eurozone countries to seek bailouts, amid uncertainty over who would lead the country when Premier Silvio Berlusconi steps down.

On Tuesday, Berlusconi said he would step aside for the good of the country once Parliament passes economic reforms, and that he would not run again for office.

His move saw a brief rally in markets, but sentiment quickly reversed as it remained unclear what government would take over.

The yield on Italy's 10-year bonds surged Wednesday to a high of 7.40 per cent, up 0.82 of a percentage point from the previous day.

The seven per cent level is considered unsustainable for a government over the longer-term.

Greece, Ireland and Portugal had to ask for rescue loans once it became clear that their borrowing rates were stuck above that threshold.

The key is how long the rate stays at that level.

"It takes time to permeate to the rest of the debt mountain," said Jan Randolph, head of sovereign risk analysis at IHS Global Insight.

"Seven per cent is not sustainable over several years. It has to be brought down eventually. Otherwise, we are in danger."

He noted that Italy is in better fiscal shape than either Greece or Portugal when they sought bailouts - its deficit is below the Eurozone average, but growth is weak.

Too big a bailout

But with debts of around €1.9 trillion (US$2.6 trillion), Italy is considered too big for Europe to bail out. Higher borrowing rates will make it more difficult and expensive for Italy to roll over its debts. It has more than €300 billion (US$412 billion) to raise in 2012 alone.

In the meantime, Berlusconi is not yet out; and there is considerable uncertainty of what kind of government will follow, contributing to market instability.

"Berlusconi is the supreme political manoeuvrer. And no one will believe he has resigned until, yes, he has done so. Simple as that," Randolph said. "He survived confidence votes before and he has made comebacks. No one really believes he is gone until he is gone."

While Berlusconi confirmed he would not run for office again, he is by no means stepping out of the political limelight. In a La Stampa interview, he said he would remain active as the founder of his political party and would help out in political campaigns "which always turned out well for me".

The next government - whether run by politicians or technocrats - will likely face the same pressures as Berlusconi to enact quick reforms to shore up Italy's defences against Europe's raging debt crisis.

"It is still far from clear that the alternative will materially improve proceedings," said Lee Hardman, an analyst at the Bank of Tokyo-Mitsubishi UFJ.

As Italy's borrowing rates ratcheted alarmingly higher, Milan's stock index was trading 4.3 per cent lower at 15,002. Shares in Berlusconi's Mediaset empire were battered, trading down 9.8 per cent.

On Wall Street, the Dow opened lower and was down 284 points, or 2.3 per cent, to 11,885 at 1:30 p.m. Wednesday.

There had been hopes that Berlusconi's announcement would help calm market jitters but Parliament must still pass legislation to curb Italy's debt and spur growth. No date has been set, but Berlusconi had previously indicated it could go up for a vote in the Senate as soon as next week.

Once Berlusconi resigns, Italy's president must decide on an interim government and if it will be led by politicians or technocrats. Berlusconi wants new elections soon with his hand-picked successor, former Justice Minister Angelino Alfano, 41, as a candidate.

"I won't run. Actually I feel liberated," Berlusconi was quoted as telling La Stampa. "It's Alfano's turn."