Italian Borrowing Costs Surge to Dangerous New Record

Italy’s financial crisis deepened on Wednesday, with borrowing costs touching a new record one day after Prime Minister Silvio Berlusconi pledged to resign once Parliament passes austerity measures demanded by the European Union.

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Investors have been losing faith in Berlusconi’s ability to effectively combat Italy’s debt problems and shore up its budget, but his resignation has done little to change concerns over Italy’s ability to tackle the crisis. Italy’s borrowing costs have risen above 7%, close to levels that have required other euro zone countries to seek bailouts, including Greece, Portugal, and Ireland.

Immediately following Berlusconi’s announcement on Tuesday, stocks rallied in New York on hopes that the premier’s exit would remove a major obstacle in parliamentary negotiations, paving the way for the implementation of austerity measures to secure European Central Bank purchases of Italian debt. However, within the first few hours of trading in Europe, markets fell Wednesday for the third straight day.

Yields on 10-year Italian government bonds — the price demanded by investors to lend money to Italy — surged to 7.4% on Wednesday, the highest level since Italy adopted the euro more than 10 years ago. Financial specialists say the figure is unsustainable, as Italy would end up spending too much of its already high state expenditures on paying its creditors.

In a clear sign to investors that European leaders are worried about Italy’s ability to stamp out its debt crisis, the European Commission sends a delegation to Rome today to check on the country’s reform program. This news comes only days after the International Monetary Fund said it would monitor Italy’s progress, taking a large step outside of its usual duties.

Pressure to resign had been building on Berlusconi for weeks before his announcement, with several members of his own center-right coalition calling on the premier to step down. European leaders had been growing increasingly concerned that he no longer had enough control of his coalition to deliver on promises of crucial reforms.

On Tuesday, Berlusconi failed to muster an absolute majority in a simple procedural vote in Parliament after numerous defections from his coalition. Hours later, he met with Italian President Giorgio Napolitano and said he would resign. In a statement issued by the president’s office after their meeting, Napolitano said the prime minister acknowledged “the implications of the result of the day’s vote in the lower house,” while also expressing concerns about the urgent need to pass reforms requested by Italy’s “European partners.”

“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,” Berlusconi said in a telephone call to state broadcaster RAI.

While the fundamentals of Italy’s economy are much stronger than those of Greece, “The problem in Italy is not primarily the real data,” said Germany’s finance minister, Wolfgang Schaüble. “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.”

Still, Italy does have a public debt of 120% of its gross domestic product, the second-highest in the euro zone after Greece, and structural problems that have led to slow growth. Last summer, the government pushed through two sets of austerity measures deemed by financial markets to be insufficient, given Italy’s 1.9 trillion-euro debt load.

Last month, Berlusconi promised the European Union that he would approve a new round of restructuring, but his promises did little to instill confidence and calm market anxieties. Quite to the contrary, Berlusconi’s style of leadership had become “a major factor in impairing Italy’s credibility and undermining confidence in the ability of the Italian government to restore public finances and engage in meaningful reform,”said Thomas Klau, the director of the Paris office of the European Council on Foreign Relations.

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But for all the relief on Tuesday, it is unclear whether Berlusconi’s exit will solve Italy’s problems in the long run. “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. “I think that they will try to fill it with lemons, with minor measures,” he added, noting that over the years Italian governments have promised to sell off state assets in dozens of austerity packages “without ever selling a thing.”