Despite PM Berlusconi’s pledge to resign, borrowing costs crossed a key threshold of 7 per cent.
Neither that move nor a reassurance from Italy’s president vouching for Berlusconi’s sincerity, calmed investors, who propelled Italy’s borrowing costs through a critical financial and psychological barrier of 7 per cent, close to levels that have required other euro zone countries to seek bailouts.
Berlusconi, cornered by world markets and humiliated by a parliamentary setback, appeared to have become the most prominent victim of the broader European debt crisis. But his decision did not remove wide uncertainty about Italy’s ability to tackle the crisis, and some analysts said the prospect of a protracted period of political wrangling could exert further pressure for a quicker exit from the impasse.
Immediately after Berlusconi’s announcement on Tuesday, stocks rallied in New York on hopes that political change would help pave the way for an easing of the continent’s debt crisis. But, within hours, Europe’s stock markets fell on Wednesday for the third straight day in morning trading.
At the same time, yields on 10-year Italian government bonds — the price demanded by investors to lend money to Italy — surged on Wednesday to 7.4 per cent, the highest level since the adoption of the euro more than 10 years ago.
In Europe’s months of crisis, yields in excess of 7 per cent have triggered calls for bailouts and the subsequent demise of governments in Ireland, Greece and Portugal, but Italy’s debt is much higher than in those countries. The 7 percent barrier is seen partly as a symbolic threshold, but it also reflects hard financial facts: borrowing costs at that level make it difficult for Italy to raise new funds to pay off what it owes. The figure is widely seen by bond market analysts as unsustainable.
In the end, thus, it was not the sex scandals, the corruption trials against him or even a loss of popular consensus that appeared to end Berlusconi’s 17 years as a dominant figure in Italian political life. It was, instead, the pressure of the markets and the European Union, which could not risk his dragging down the euro and with it the world economy.
Although Berlusconi’s exit was not immediate — weeks of political wrangling over the austerity measures probably lie ahead — political commentators said they could see no escape this time for the prime minister, whose Houdini-like ability to wriggle free from scandals is legendary.
“A season is over,” said Mario Calabresi, the editor in chief of the Turin daily newspaper La Stampa, who said Berlusconi told him that he was not only stepping down, but also would not run for office again.
With fears that the debt crisis would spread from Greece to Italy, whose economy is too big to bail out, pressure had been building on Mr. Berlusconi to resign for weeks, including recently from members of his center-right coalition. Even the Roman Catholic Church, whose support is crucial for any Italian government, began harshly criticizing him.
European leaders, who have long questioned Berlusconi’s commitment to fundamental economic changes, had become especially concerned that he no longer had enough control of his coalition to deliver on promises of crucial reforms and that in a crisis built partly on perception, Italy’s reputation was too closely linked to his own.
In a sign of the seriousness of the fears, a delegation from the European Commission was due in Rome on Wednesday to check on the country’s reform program, days after the International Monetary Fund said it would monitor Italy’s progress, a rare intrusion for an economy the size of Italy’s.
Berlusconi’s announcement came just days after Greece’s leader, Prime Minister George A Papandreou, also overcome by financial troubles, agreed to resign in favor of a unity government.
The immediate trigger for Berlusconi’s decision was a procedural vote in Parliament that made it clear that he had lost his majority after defections from his coalition. Umberto Bossi, a crucial ally and the leader of the Northern League, a coalition member, said he had told the prime minister to step aside for the good of the country. Hours later, he met with the president of Italy, Giorgio Napolitano, and said he would resign.
A statement issued by the president’s office after the meeting said that the prime minister had acknowledged “the implications of the result of the day’s vote in the lower house,” but at the same time had expressed “concerns” about the need to pass the urgent reforms requested by Italy’s “European partners.”
In a phone call to the state broadcaster RAI, Mr. Berlusconi said, “Today’s vote reinforced my concerns about the moment that we are experiencing, a situation where the markets do not believe that we really want to introduce the liberalizing measures that Europe insistently asked us to carry out.”
By linking his fortunes to the austerity package — whose contents have not yet been made final —Berlusconi effectively blocked the opposition and dissidents within his own party from bringing him down in a humiliating confidence vote over the measures.
His announcement, in the meeting with Napolitano, made the event seem almost anticlimactic, allowing Berlusconi to exit somewhat gracefully.
“It was the last act of the government and the only act where the government will have the support of the opposition,” said Massimo Franco, a commentator for the newspaper Corriere della Sera. “It’s a compromise that allows Berlusconi to buy some time before exiting the stage immediately and for the opposition to say that Berlusconi is falling.”
Indeed, after Berlusconi’s announcement, the center-left opposition leader Pier Luigi Bersani called the prime minister’s decision a “turning point that we welcome with great satisfaction.”
To some, Berlusconi had quietly, if belatedly, followed the example of Prime Minister José Luis Rodríguez Zapatero of Spain, who stepped aside to allow for early elections, causing market pressure on Spain to ease. “We are doing what Spain did months ago,” Mr. Calabresi of La Stampa said. “If we’d done it sooner we would have avoided more trouble.”
While the fundamentals of Italy’s economy are much stronger than those of Greece, the country has a public debt of 120 percent of its gross domestic product, the highest in the euro zone after Greece, and structural problems that have led to low growth.
“The problem in Italy is not primarily the real data,” Germany’s finance minister, Wolfgang Schaüble, said in Brussels on Tuesday. “The debt is high, the deficit is not — economic data are not that bad. The problem is a lack of trust from the financial markets.”
For all the relief on Tuesday, it is unclear that Berlusconi’s exit would solve Italy’s problems in the long run since any government that follows will be left to carry out tough austerity measures in a system built on political patronage.
“The real problem is that in reality, the austerity bill is an empty box into which they have to put things that will be very unpopular,” said Mario Deaglio, a professor of economics at the University of Turin.
Berlusconi’s future is also unclear because of the court cases against him. The day he stops being prime minister, he risks losing legal immunity.
Berlusconi, who is 75, served his first brief term as prime minister in 1994, returned for several years starting in 2001 and began his latest term in 2008.
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