Markets plunge as Silvio Berlusconi keeps his grip on power

By David Maddox
Published on Thursday 10 November 2011 12:12

WORLD markets nose-dived as the deepening political and economic crisis in Italy prompted fears that the eurozone may be on the verge of collapse.

The drop in the value of shares followed a decision by the bond markets to push Italy’s interest payments to a staggering 7.4 per cent as analysts reacted to controversial prime minister Silvio Berlusconi’s announcement that he would not leave office immediately.

It pushed Italy’s interest payments well beyond the level most observers believe the country can pay and to the point where other European countries including Greece, Portugal and Ireland, have been forced to go cap in hand and ask for a bailout.

The plight of the world’s eighth-largest economy and third biggest bond market is the greatest threat yet to the stability of the eurozone and its collapse would drag in Britain where banks hold billions of pounds of Italian debt.

But as financial markets pounded Italy amid worries that Mr Berlusconi would linger in office and delay reforms, Italy’s president was forced to respond by declaring there was no doubt that Mr Berlusconi would leave soon in a bid to soothe investors.

In another chaotic day driven by the European debt crisis, the Dow Jones industrial average dropped nearly 390 points in New York after Italy’s borrowing costs soared to a new record high, while the FTSE fell more than 100 points, the German Dax 131 points, and the French Cac 68 points.

Mr 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, but Italian president Giorgio Napolitano said that would be accelerated to days, allowing him to quickly begin talks on forming a new government or calling new elections.

“Fears are totally unfounded that Italy may experience a long period of inactivity,” Mr Napolitano said, adding that “emergency measures” could be adopted at any time.

Italy’s key borrowing rate hit a high of 7.4 per cent as markets expressed concern about how swift and complete Italy’s political transition would be.

That is more than the level that eventually forced other eurozone countries like Greece and Portugal to seek bail-outs. They settled down to 7.26 per cent after Mr Napolitano’s remarks.

With debts of £1.6 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.

The European Central Bank has been buying up Italian bonds to keep yields at reasonable rates, but critics say that is just throwing good money after bad.

Italy needs to pass the additional austerity measures and structural reforms pledged by Mr Berlusconi to world leaders at an economic summit last week. Any delays in the financial reforms or in establishing a new, stable Italian government could frighten the markets, which are already unnerved since some investors in Greece are going to lose 50 per cent of their holdings. Investors fear a so-called “haircut” could also affect those owning Italian bonds if Italy does not get its act together.

In the meantime, Mr Berlusconi is not yet out and there is considerable uncertainty of what kind of government will follow.

While Mr Berlusconi is not running for office again, he said he would remain active as the founder of his political party and would help out in any political campaigns.

Mr Berlusconi wants new elections soon with his hand-picked successor, former justice minister Angelino Alfano, as a candidate.

The 75-year-old leader tipped Mr Alfano to head his People of Liberties Party a few months ago. At 41, he represents a new generation of centre-right politicians after 17 years of Berlusconi leadership.

The growing Italian crisis led to the second appeal to eurozone leaders in a week by Prime Minister David Cameron as he answered questions in the Commons yesterday.

The Prime Minister has done little to hide his frustration with the leaders of France and Germany, in particular, for failing to agree on a way forward or create a bigger financial firewall to protect struggling countries.

Mr Cameron said the Italian yields were “getting to a totally unsustainable level” and called for eurozone countries to boost their bail-out fund to prevent the crisis spreading further.

“If you don’t have credibility about your plans to deal with your debts and deal with your deficits, whether you like the markets or not, they won’t lend you any money,” Mr Cameron told MPs. “That is what we are seeing in countries like Greece and now, tragically, in Italy, where the price of borrowing money is getting to a totally unsustainable level.”

He went on: “Eurozone leaders urgently need to put flesh on the bones, to put figures on the size of that firewall to stop the contagion going any further.”

Market analysts also blamed the lack of political leadership in Europe for the escalation of a crisis which threatens to bring down the euro.

“Everyone is waiting on the next shoe to drop out of Europe,” said Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia in New York.

“It seems there are no leaders and there are no answers, and that is scaring people.”

“Berlusconi is the supreme political manoeuvrer. 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.

But despite the fears the European Council President Herman Van Rompuy vowed to keep the euro together.

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Canton-eze

Sunday, November 13, 2011 at 02:53 AM

#1 Danielrober2 - You are either totally naive, thick, or simply taking the p!ss. Berlusconi is a proven liar, crook, and all-round sleazebag. Yup, just the sort of example your "Great" Britain needs, and already has. Lamborghinis, battleships, national anthems, and Beatles ... FFS. what planet ....?! Note that he is now out of power, at long last, to Italy's relief. He only ever represented the Italy far north of Rome.

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TlertTlarm

Thursday, November 10, 2011 at 08:13 PM

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A Friend of Fernando Poo

Thursday, November 10, 2011 at 06:15 PM

Bond vigilantes starting in on France now. Le game c'est une bogie.

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Heinz Doofensmirtz

Thursday, November 10, 2011 at 02:55 PM

Quel domage. Have the cybernuts been had the ring of their blackberry tightened to avoid any mention of European Union regime change and loss of sovereignty forced upon them by a Franco-German entente de threat.

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A Friend of Fernando Poo

Thursday, November 10, 2011 at 01:35 PM

Looks like the Euro is in its death throws. I suspect they won't be able to ask the bond vigilantes to vote, vote, and vote again until they get the answer the Europols want. If the succeed in bringing down the Euro, we should give the bond vigilantes a Queen's Award for Industry.

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Heinz Doofensmirtz

Thursday, November 10, 2011 at 12:08 PM

Where are all the cybernuts who stated I was an idiot for suggesting that there is Franco-German plan to establish a new Europe based upon them creating a new trade zone for countries using the euro which will be compelled to buy french and german goods to ensure they can manufacture themselves out of trouble. It's a real shame we are not already there as we too could have regime change forced upon us and be compelled to buy French and German stuff on fear of having our economy destroyed. Good work SNP europhiles.

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Scotfree

Thursday, November 10, 2011 at 10:37 AM

Wars are expensive and wars against former allies who offered major investment and financial support are very expensive. The Libyan chickens "creditors" are coming home to roost for Italy and will soon be knocking on the doors of France and the rest.

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Danielrober2

Thursday, November 10, 2011 at 09:27 AM

I always liked Mr Berlusconi. He is a real business person, with experience building companies and employing people. He was also democratically elected. As a liberal I try not to judge other people’s lives, but I suspect the man really is needlessly attacked due to his incredible successes. To me the man reflects that amazing effort in Europe post WWII to build a new economy where Lamborghinis became the desirable measure of success rather than battleships, and national anthems were replaced by the Beatles, for all our mutual good (you know such as peace). Knee jerk life style judgements aside, Europe needs more people like Mr Berlusconi, not less.

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