Berlusconi's resignation pledge fails to quell crisis; markets plunge

ROME — Prime Minister Silvio Berlusconi’s pledge to resign failed to quell a growing investor panic Wednesday over indebted Italy’s ability to pass austerity measures and pay its bills, sending the nation’s borrowing rate soaring to levels that could force the world’s eighth-largest economy to seek international help.

The negativity spread to global markets, as Italian borrowing rates surged above 7 percent and stock markets in Milan, Paris, Frankfurt and New York dropped markedly.

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The Dow Jones industrial fell more than 3 percent Wednesday on fears that Italy's debt problems may be uncontrollable. (Nov. 9)

The Dow Jones industrial fell more than 3 percent Wednesday on fears that Italy's debt problems may be uncontrollable. (Nov. 9)

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Euro zone’s political casualties
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The Dow Jones industrial average, the S&P 500 stock index and the tech-heavy Nasdaq each closed down more than 3 percent Wednesday. Italy’s benchmark index dropped 3.8 percent, while Germany’s DAX and France’s CAC-40 each fell 2.2 percent.

Investors appeared to be weighing several immediate factors, notably the prospect that Berlusconi’s departure — contingent on parliament passing austerity measures — could drag on for weeks. But even after Berlusconi goes, Italy will still need to come to grips with a $2.6 trillion pile of debt and a moribund economy that has wallowed for years in low or negative growth.

Concerned executives in Italy’s financial industry were pushing for fast action, saying a package of reforms required by the European Union must not, as some in Berlusconi’s party have suggested, take weeks to pass. Rather, they called for dramatic acceleration of the process to calm market fears, suggesting that Italian lawmakers should vote as soon as this weekend.

To ease markets, Italian politicians were also racing to take up key austerity and economic measures, which could go before the upper house as early as Friday and the lower house as soon as Saturday. That would mean Berlusconi could step down by Saturday night.

Italian President Giorgio Napolitano on Wednesday named Mario Monti, a former appointee to the European Commission, as a senator for life. The moved fueled speculation that politicians would rally around the noted statesman as a possible head of a new unity government after Berlusconi leaves office.

“We believe that the [borrowing rate] spread can go back to more normal conditions if we pass the reforms package this weekend and see a resolution with Berlusconi going forward with his statement to step down,” said Giovanni Sabatini, general manager of the influential Association of Italian Bankers in Rome. “This is what has to happen. With the market as it is, we cannot wait weeks.”

It was a testament to Berlusconi’s declining credibility that some in the opposition, as well as more than a few investors, were not immediately taking the prime minister’s word that he would resign. But Napolitano, Italy’s ceremonial head of state, reiterated Wednesday that there is no going back for the prime minister.

“There is no uncertainty about Berlusconi’s resigning,” Napolitano said.

In an interview with La Stampa newspaper published Wednesday, Berlusconi additionally vowed not to run again in the nation’s next elections. “I won’t run for office,” he said, adding that the decision made him feel “liberated” and that he might go back to running his soccer club, AC Milan.

Famous for courting controversy, Berlusconi, a 75-year-old media mogul who dominated Italy’s political landscape for the better part of two decades, compared his loss of support in recent days — particularly among his own backers — to the experiences of dictator Benito Mussolini during World War II.

Berlusconi said in the interview he has been reading a book of letters written by Mussolini to a lover. “At a certain point he says: ‘But don't you understand that I don't count for anything anymore, I can only make suggestions,’ ” Berlusconi said. “I have felt in the same situation.”

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.

Berlusconi’s offer to resign, if carried out, would make him the highest-profile figure to fall in Europe’s two-year-old debt crisis, joining a club that includes leaders in Portugal, Ireland and, most recently, Greece. His pending exit raised fresh doubts about who would lead Italy through difficult times in the weeks and months ahead and whether its divided political class could unite behind a plan to win back investor faith.

“Evidently the markets don’t believe that Italy has the will to carry out the reforms that Europe asks of us,” Berlusconi told Sky TV after his announcement. “We have to show the markets that we are serious . . . for the good of the country.”

Earlier in the day, Berlusconi’s dear friend and most formidable ally, Northern League chief Umberto Bossi, openly called for the prime minister to go. That was quickly followed by a highly anticipated parliamentary showdown in which Berlusconi won a routine budget vote, but only after the opposition abstained.

The result showed that political defections among his supporters had left him roughly eight votes short of a majority in Parliament, making him vulnerable to a no-confidence vote.

Berlusconi is a consummate political survivor who has weathered more than 50 such votes over the years and should never be underestimated. But by late Tuesday evening, Bossi and Berlusconi himself were already promoting Alfano, the relatively young chief of Berlusconi’s People of Freedom Party, as his successor — a choice that would still give the prime minister ample behind-the-scenes political clout.

Berlusconi ruthlessly built his career — and became Italy’s richest man — while at the same time winning over Italians by presenting himself as an affable attention-seeker. His tabloid foibles — including allegations of orgies at his home, which led his ex-wife to describe him as “sick” — dealt blows to his popularity. As Italy became swept up in the debt crisis, his approval ratings were bottoming out in the low 30s.

“He has lost a lot of his electorate because they fear their savings will be wiped out in these conditions,” said Arianna Montanari, a professor of political sociology at La Sapienza University of Rome.

Observers here said his pledge to leave was hastened by a sense that Berlusconi was personally costing Italy its international credibility. They pointed to the smirks last month by German Chancellor Angela Merkel and French President Nicolas Sarkozy when asked about their faith in Berlusconi.

At a summit of the Group of 20 leading economies last week, Berlusconi was effectively forced to accept economic oversight by the International Monetary Fund. An economic monitoring team from the European Commission is due to arrive in Rome on Wednesday.

The biggest loser in Berlusconi’s departure would be the prime minister himself. He has three trials pending in Milan, including one on charges of paying for sex with a minor and abusing power in the case of Moroccan nightclub dancer Karima El Mahroug, nicknamed Ruby Heart Stealer. He is also facing tax fraud and corruption charges.

By leaving office, Berlusconi will be somewhat less equipped to dodge those trials. Though unsuccessful in his attempt to pass a law that would have given him blanket protection from prosecution, as premier he has been able to delay court appearances when he can prove to the court that he has a “legitimate impediment” imposed by his job.

“You know that Mel Brooks movie, ‘Blazing Saddles’?” said Beppe Severgnini, author of a book on the prime minister. “Well, under Berlusconi, Italy was the spaghetti-western version. A lot of Italians, a lot of people everywhere, will be relieved when it’s over.”

Special correspondents Sarah Delaney in Rome and Karla Adam in London contributed to this report.

 
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