Berlusconi has pledged to resign after the Italian parliament passes the financial reforms that European officials have been demanding for months. The process can take up to two weeks — and even though the opposition vowed Wednesday to speed that up, markets were clearly wary of what might transpire in the meantime.
“Berlusconi is the supreme political maneuverer. And no one will believe he has resigned until, yes, he has done so. Simple as that,” said Jan Randolph, head of sovereign risk analysis at IHS Global Insight “He survived confidence votes before and he has made comebacks. No one really believes he is gone until he is gone.”
Italy’s key borrowing rate spiked well above the 7 percent level that eventually forced other eurozone countries like Greece and Portugal to seek bailouts, surging to a high of 7.40 percent, up 0.82 of a percentage point from the previous day.
No one is suggesting that Italy is headed for an immediate bailout. Randolph said it will take a while for the higher borrowing rate to cause problems for Italy’s “mountain of debt.”
But the markets are whipping up a catastrophic scenario, something analysts say is the only thing that can make sure Berlusconi budges.
“With a catastrophic scenario — and it seems we are facing now a catastrophic scenario — maybe Berlusconi can be pushed to support a new government. Or maybe his party will crumble,” said Roberto D’Alimonte, a political analyst at Rome’s LUISS University.
In the event Italy’s respected president cannot form a new government after Berlusconi officially resigns, the billionaire will remain on as a caretaker prime minister with fewer powers but still in office until elections can be held, D’Alimonte said. February is the earliest date being floated.
That is exactly what the markets don’t want.
Noted economist Nouriel Roubini, who has lived in Italy, expressed a similar view on Twitter: “Yields at 7%: markets are telling Berlusconi to leave NOW. They don’t buy his scheme of pretending to leave in 2 weeks after budget is passed.”
D’Alimonte said the markets want a technical government, led by former EU competition commissioner Mario Monti, who now runs the prestigious Bocconi University. Berlusconi and his allies claim such a solution would be undemocratic, however — ignoring the fact that any plan to put in Berlusconi’s hand-picked successor, former justice minister Angelino Alfano, would also be undemocratic.
The opposition said it would push to pass reforms promised to the European Union in a matter of days, not weeks.
“The problem isn’t Berlusconi’s resignation which is a given, but the spread,” said Anna Finocchiaro, the head of the opposition Democratic Party in the Senate. She said the opposition wanted to pass the reforms in the upper chamber no later than Monday.
“We have to reassure our creditors,” she said.
With debts of around 1.9 trillion euros ($2.6 trillion), Italy is considered too big for Europe to bail out. Higher borrowing rates will make it more difficult and expensive for Italy to roll over its debts. It has over 300 billion euros ($412 billion) to raise in 2012 alone.
The European Central Bank has been buying up Italian bonds to keep yields at reasonable rates — but Randolph said that is throwing good money at bad.
“You can bring yields down, but they can’t keep them down unless the borrowing government takes concrete steps to improve creditworthiness,” Randolph said.
“Seven percent is not sustainable over several years. It has to be brought down eventually. Otherwise, we are in danger,” he said.
In this case, Italy needs to pass the additional austerity measures and structural reforms pledged by Berlusconi to world leaders at an economic summit last week. Any delays in the reform course and establishing a new, stable government would be sorely punished by the markets.
“Markets attack weak animals like lions,” said political analyst Franco Pavoncello, president of Rome’s John Cabot University. “Italy is perceived as being extremely weak politically, which is too bad because economically it is not too weak.”
In the meantime, Berlusconi is not yet out — and there is considerable uncertainty of what kind of government will follow, contributing to market instability.
While Berlusconi confirmed he wouldn’t run for office again, he’s by no means stepping out of the political limelight. In an interview with La Stampa daily, he said he would remain active as the founder of his political party and would help out in any political campaigns.
“I won’t run, actually I feel liberated,” Berlusconi was quoted as telling La Stampa. “It’s Alfano’s turn.”
Berlusconi tapped Alfano, his former justice minister, to head his People of Liberties Party a few months ago. At 41, Alfano represents a new generation of center-right politicians after 17 years of Berlusconi leadership.
But D’Alimonte said there is little question Berlusconi would still be pulling the strings.
“He will be the major protagonist of the next election. He will push Mr. Alfano as the candidate, ,but he will be the director of the orchestra. Alfano will be the first violin,” D’Alimonte said.
The rising bond yields underline the quandary European officials find themselves in as they try to come up with an effective backstop for indebted countries, one with enough financial muscle to support the eurozone’s No. 3 economy. European governments decided last month to increase the effective power of their 440 billion euros ($600 billion) rescue fund, the European Financial Stability Facility, which is considered too small to bail out Italy.
European finance ministers are still working on the complex details of how to increase the fund’s effective lending power to over €1 trillion ($1.36 trillion) by having it partially insure government debt issue or by attracting outside investors. There are doubts among outside economists about whether either method will work.
The European Central Bank thus remains the only available outside firewall available against Italy’s rising yields. It has been buying government bonds in the secondary market, which drives down yields and the borrowing costs Italy would face to roll over its debt as it comes due.
But the bank has warned the program is only temporary. New ECB president Mario Draghi — himself an Italian — said last week it was “pointless” for governments to expect outside help to drive down interest rates and the only solution was for governments to reform their own finances.
Some analysts have speculated the ECB may be deliberately limiting its bond purchases so rates stay high enough to keep the pressure on Italy’s reluctant government to push ahead with economic reforms
The ECB said Monday it increased purchases last week to 9.5 billion euros ($13 billion) from 4 billion euros ($5.5 billion) the week before. It doesn’t disclose which bonds it bought.
