Berlusconi rejects resignation reports

Stocks recovered from early big losses today as Italy’s borrowing costs eased on mounting speculation that the Italian Premier Silvio Berlusconi would soon resign.

However Mr Berlusconi immediately rejected reports that he was on the verge of quitting.

Following last week’s turmoil centred on worries that Greece was heading for an imminent bankruptcy, investor fears are now focused on Italy, the eurozone’s third largest economy. Italy is also the third-biggest debt market in the world.

If its cost of borrowing rises too much, then Italy will not be able to raise the money it needs to roll over its debts, potentially raising fears over the European banking system and the global economy.

The growing worry is that, at some point, it will cost too much for Rome to borrow money from markets – as it did for Greece, Portugal and Ireland before. Only this time, Europe won’t be able to come to the rescue because Italy’s economy is generally considered too big to bail out.

“The leader and his country are in danger of taking the rest of Europe, if not the world, into economic hell,” said Louise Cooper, markets analyst at BGC Partners.

The gyrations in the markets are being driven by Mr Berlusconi’s future. After early big falls, which came as Italy’s ten-year borrowing costs rose to euro-era highs of 6.66%, stocks recovered their poise amid speculation that he was preparing to stand down.

Elsewhere in Europe, Ireland's ISEQ was up 0.41% to 2,675.47, France’s CAC-40 was 0.1% higher at 3,126 while Germany’s DAX rose a similar rate to 5,972. Britain’s FTSE 100 underperformed, trading 0.5% lower at 5,497.

Investors want the Italian government to urgently pass measures to boost growth and cut debt. Italy’s borrowing costs have skyrocketed since the summer, and that only makes it more expensive for the country to pay down its debt.

Greece has stepped back from the brink, promising to cobble together a unity government that looks like it will continue with reforms, but Berlusconi faces a confidence vote this week.

Earlier, Asian shares fell. Japan’s Nikkei 225 index dropped 0.4% to close at 8,767.09. South Korea’s Kospi lost 0.5% to 1,919.10 and Australia’s S&P/ASX 200 was down 0.2% at 4,273.40.

Hong Kong’s Hang Seng sank 0.8% to 19,677.89. Mainland China’s benchmark Shanghai Composite Index lost 0.7% to 2,509.80 and the Shenzhen Composite Index lost 0.6% to 1,065.31.