Italy’s debt woes worsen despite Berlusconi pledge to step down

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REPORTING FROM ROME -- Italy’s debt problems worsened Wednesday as the nation’s borrowing costs soared to a new record, past the 7% threshold that analysts say is unsustainable and puts the world’s eighth-largest economy at increasing risk of insolvency and in need of a bailout.

The unexpectedly sharp jump in the Italian 10-year bond yield came despite Prime Minister Silvio Berlusconi’s pledge Tuesday that he would resign after the Parliament passed a package of measures to reduce the government’s big debt load.

Analysts had hoped that financial markets would take some comfort in Berlusconi’s promise, given that he had become a focal point for Italy’s troubles and the Eurozone’s debt crisis.

But not only was there no rally, stock markets in Europe tumbled, sending Wall Street sharply lower on early trading. Analysts said that even with Berlusconi’s promise, it wasn’t a clean and decisive departure –- and in some ways made it more apparent that Rome may not have the political capacity to push through tough austerity measures needed to get its finances in order.

Raj Badiani, an analyst at IHS Global Insights in London, said Berlusconi’s conditional resignation suggests more “political turmoil and chaos over the next three or four weeks.” He added, “The problem with the reform is that it’s coming up against really strong and entrenched interests.”

There were unconfirmed reports Wednesday in Rome that a draft of a reform bill was circulating in the upper chamber of Parliament, but many parts of the package will undergo contentious negotiations, including calls for greater labor flexibility and lowering of the pension retirement age.

Although the surging Italian bond yield is certainly bad news, Badiani doesn’t think Italy faces an immediate threat of going insolvent. Its financing needs for the rest of this year are modest, he said, and unlike Portugal or Ireland, Italy’s budget situation is more sound.

Even so, he said a prolonged period of bond yields higher than 7% alongside a faltering economy is a “dangerous mix” and could eventually push Italy over the edge, joining Portugal, Ireland and Greece in seeking a rescue.

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-- Don Lee