His statements came as yields on Italy’s 10-year bonds rose to 7.4 percent, reaching levels that sparked a total loss of confidence in Greece, Portugal and Ireland and forced those nations to seek international rescues.
Chris Williamson, chief economist at Markit Research in London, said the “sheer size” of Italian debt is concerning markets because “the government is looking unable to implement measures to reduce the debt because of political limbo.” At the same time, “growth prospects have deteriorated markedly. . . . Italy could be facing another recession that will make it even harder to reduce its deficit.”
He said that if borrowing rates “stay this high, it suggests the Italian government won’t be able to service its debt, and how to deal with that remains to be seen.” Italy’s debt is so high, and its economy — larger that India’s or Russia’s — is so big that analysts say it would severely test the ability of international lenders to come up with a big enough bailout.
Observers were viewing Berlusconi’s announcement Tuesday as a final chapter of his premiership. It came after his political support crumbled, with friends and foes alike demanding his departure.
In a twist of fate, his political undoing was coming not from the lurid list of allegations against him, including corruption and paying for sex with a minor, but instead from the debt crisis.
Investors have been rapidly losing faith in deeply indebted Italy. They fear a catastrophic default here that could send shock waves through global markets. Berlusconi himself was widely seen as a big part of the credibility problem, with his divisive leadership endangering political consensus on austerity measures and economic reforms demanded by European leaders to restore market confidence.
In making his resignation offer, the prime minister conceded that Parliament had become “paralyzed” by his bid to stay in office. By promising to resign upon approval of those measures, he sought to clear the way for their passage.
But late Tuesday, Berlusconi’s opponents said they might try to press for a speedier ouster of the prime minister. Opposition leaders were calling for Napolitano to back plans to install a new unity government run by a neutral political figure. Berlusconi, set to remain at least a potential kingmaker in Italian politics, said he opposed the idea, instead backing a plan for new elections after his resignation and openly pushing for his anointed successor, Angelino Alfano, to take his place.