Markets wait for key Italian vote

Italy’s borrowing rates have hit their highest level since the euro was established, ahead of a budget vote in parliament that could ratchet up the pressure on premier Silvio Berlusconi to resign.

The markets have turned their attention this week from the political crisis in Greece – where the two main parties were locked in talks to forge a national unity government – to Rome.

Mr Berlusconi’s government is under intense pressure to enact quick reforms to shore up Italy’s defences against Europe’s debt crisis. However, a weak coalition and doubts over Mr Berlusconi’s ability to push through austerity and reforms have heightened the unease in financial markets that Italy could need financial aid.

What happens in Italy is a particular worry as it is the eurozone’s third-largest economy. With debts of around €1.9 trillion it is considered by many in the markets as being too big for Europe to bail out.

Higher rates would make it more difficult for Italy to roll over its debts and will mean they consume more and more of national income.

The yield on Italy’s 10-year bonds was up 0.07% at 6.60 %, down from an earlier high of 6.74%. A rate of over 7% is considered unsustainable and proved to be the trigger point that forced Ireland, Greece and Portugal into accepting the need for financial bailouts.

The budget vote is on a knife-edge, with Mr Berlusconi’s coalition showing signs of fracture.

The Chamber of Deputies vote, on a routine measure, is not a confidence vote - whose loss would require Mr Berlusconi to resign. But a loss would certainly send a political message that he is in trouble.

In less tense times, the vote would have meant routine approval of the 2010 state accounts, but instead it has become a crucial test of Mr Berlusconi’s survival as head of his centre-right government. Last month, the vote of the same measure failed by one vote.

Opposition forces were considering boycotting the vote so the numbers would more clearly show just how many deputies still support the government. If Mr Berlusconi’s forces number less than 316 deputies – or one more than half the number of the 630-member chamber, it would be plain that the media mogul no longer can count on a majority in the lower house of Parliament.

The government could still win the vote, by commanding more than half of those showing up to vote, but a dismal showing could show Mr Berlusconi is too weak politically to continue to govern.