Italy’s borrowing rates spiked way above the 7 per cent threshold that forced other eurozone countries to seek bailouts, a day after Premier Silvio Berlusconi announced he would resign once Parliament passes economic reforms.

On Tuesday, Berlusconi said he was stepping aside for the good of the country and wouldn’t run again for office, but his move failed to calm jittery markets. The yield on Italy’s 10-year bonds surged Wednesday to a high of 7.36 per cent.

The rise in Italy’s ten-year yield to over 7 per cent is likely to raise jitters that the eurozone’s third-largest economy will face the same pressures as Greece, Ireland and Portugal beforehand once their rates rose above that threshold. Markets were unconvinced that a strategy to get their debts down would work and the three small countries were eventually forced into asking for financial help.

With debts of around 1.9 trillion ($2.6 trillion), Italy’s debts are considered by many in the markets as being too big for Europe to bail out. And higher rates would make it more difficult for Italy to rollover its debts and will mean they consume more and more of national income. Italy has over 300 billion ($412 billion) to raise in 2012 alone.

The worry appears to be that even without Berlusconi at the helm, Italy faces a period of political deadlock. The next government 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, sentiment in markets took a battering and 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 percent at 2.262.

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. It could take weeks to pass the measures demanded by the European Union to keep Italy from becoming the next victim of Europe’s debt crisis.

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, Angelino Alfano, as a candidate.

“I won’t run, actually I feel liberated,” Berlusconi was quoted as telling the La Stampa daily. “It’s Alfano’s turn.”

Keywords: Italy's economy

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