Italy’s prime minister Silvio Berlusconi agreed to resign on Tuesday night. He will leave office once a new law has been passed, enabling European Union-imposed austerity measures to be implemented. Italy could now hold elections next year, although, as Guy Dinmore noted in the FT, in theory Berlusconi “could decide to run again”. Opposition politicians are calling on Italian president Giorgio Napolitano to form a national unity government.
The news came as Italy’s bond market went into meltdown. Five-year Italian bond yields breached the significant 7% threshold – which has signalled a bail-out for other countries, such as Ireland and Greece – despite intervention by the European Central Bank. As the BBC’s Robert Peston noted, once sovereign yields hit 7%, new lenders will no longer throw good money after bad and risk seeing their capital used to service interest on existing debt. “The spread between ten-year and two-year debt has narrowed to dangerous levels,” said Forex.com research director, Kathleen Brooks. “This signals intense stress in Italy’s credit market.” European Commission officials are due in Rome to monitor Italy’s debt-reduction scheme.
What the commentators said
While Berlusconi’s departure may boost sentiment, “it is not obvious his successors would do any better”, said Dario Perkins at Lombard Street Research. Italian governments are “always fragile and fractious” and the country’s economic problems “deep and structural”. Too many small and medium-sized firms produce low-value goods yet are unable to compete with Asia and eastern Europe.
Italy is suffering “something like a run on a bank”, said The Economist.com, although in this case it is “a run on the government” and Berlusconi himself. The government is in paralysis while Italy’s cost of borrowing, which “falls when Berlusconi wobbles and rises when he looks more secure”, lurches towards a sovereign default. That’s despite the fact that the country is technically solvent on some measures – unlike America or Britain, it boasts a surplus in its public finances before debt payments.
This is why it is hardly right that European Union officials should in effect dictate who governs Italy, said Jeremy Warner in The Daily Telegraph. “Since when was it thought acceptable for the central bank effectively to decide on what the government in Italy should be?”
By claiming there is no support for Italian bond markets until the country implements reforms, when in truth the country may simply be facing a short-term liquidity shortfall on its existing liabilities, “the European Central Bank is playing god in a way which is almost certain to end badly”.