Italy’s borrowing rate soars above 7% danger level

ITALY’S key borrowing rate has soared to well above the 7 per cent level that eventually forced other eurozone countries to seek bailouts.

The rise came amid uncertainty over who would lead the country when premier Silvio Berlusconi steps down.

He has said he would step aside for the good of the country once parliament passes economic reforms. His move saw a brief rally in markets but sentiment quickly reversed as it remained unclear what government would take over.

The yield on Italy’s 10-year bonds surged to a high of 7.40 per cent, up 0.82 per cent from the previous day.

The 7 per cent level is considered unsustainable for a government over the longer-term. Greece, Ireland and Portugal had to ask for rescue loans once it became clear that their borrowing rates were stuck above that threshold.

The key is how long the rate stays at that level.

“It takes time to permeate to the rest of the debt mountain,” said Jan Randolph, head of sovereign risk analysis at IHS Global Insight. “7 per cent is not sustainable over several years. It has to be brought down eventually. Otherwise, we are in danger.”

He noted that Italy is in better fiscal shape than either Greece or Portugal when they sought bailouts - its deficit is below the eurozone average, but growth is weak.

But with debts of around £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.

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

“Mr Berlusconi is the supreme political manoeuvrer. And no one will believe he has resigned until, yes, he has done so. Simple as that,” Mr Randolph said. “He survived confidence votes before and he has made comebacks. No one really believes he is gone until he is gone.”

While Mr Berlusconi confirmed he would not run for office again, he is by no means stepping out of the political limelight.

He said he would remain active as the founder of his political party and would help out in political campaigns “which always turned out well for me.”

The next government - whether run by politicians or technocrats - will probably face the same pressures as Mr Berlusconi to enact quick reforms to shore up Italy’s defences against Europe’s raging debt crisis.

As Italy’s borrowing rates ratcheted alarmingly higher, Milan’s stock index was trading 4.3 per cent lower at 15,002. Shares in Mr Berlusconi’s Mediaset empire were battered, trading down 9.8 per cent.

There had been hopes that Mr Berlusconi’s announcement would help calm market jitters but parliament must still pass legislation to curb Italy’s debt and spur growth. No date has been set, but Mr Berlusconi had previously indicated it could go up for a vote in the Senate as soon as next week.

Once Mr Berlusconi resigns, Italy’s president must decide on an interim government and if it will be led by politicians or technocrats. Mr Berlusconi wants new elections soon with his hand-picked successor, Angelino Alfano, as a candidate.

Mario Monti, a former EU competition commissioner who now heads Milan’s prestigious Bocconi University, has been widely tipped as a candidate to head a technical government.