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Financial fears are shifting to Italy

Demonstrators wear masks mocking Italian Premier Silvio Berlusconi, right, and Reform Minister Umberto Bossi.

Associated Press

Demonstrators wear masks mocking Italian Premier Silvio Berlusconi, right, and Reform Minister Umberto Bossi.

ROME — The center of Europe's debt crisis was rapidly shifting Monday from tiny Greece to far-bigger Italy, threatening to open a dangerous new chapter in the region's financial turmoil and plunging embattled Prime Minister Silvio Berlusconi into the deepest political crisis of his two-decade career.

Investors staged a fresh run on Italian bonds that drove borrowing costs for the world's eighth-largest economy above 6.5 percent, brushing up against levels that, once crossed by Greece, Portugal and Ireland, led to a quick erosion of confidence that triggered international bailouts.

The escalating turmoil in Italy highlights the repeated failures of European leaders to come to grips with the debt crisis, which has been building over the past two years.

Officials had hoped that the markets would calm after politicians in near-bankrupt Greece rallied around a plan last week that would bring sharp austerity in exchange for a bailout. But investors, now fretting over Italy and doubting whether European leaders can muster the will to truly resolve the crisis, instead appear as skeptical as ever that highly indebted European countries will be able to pay their bills.

Should Italy, which has amassed more than $2.6 trillion in debt, fail to quell the rapid escalation of borrowing costs, the impact could greatly worsen the already bleak outlook for the global economy. Italy's bonds are among the most widely held in the world. Any hint that they might not be worth their promised value could shatter confidence in the ability of other indebted governments, particularly in Europe, to make good on their obligations.

On Monday, Italy's fate seemed increasingly tied to that of Berlusconi, a wily 75-year-old politician who, in his opera-plot-like tenure, has survived scandals from allegations that he hosted sex parties to accusations of corruption.

With his fragile leadership now seen as one of the biggest obstacles to passage and implementation of a critical reform package, reports that he might be preparing to resign sparked a sudden turnaround rally in Italian stocks and bonds. The market optimism faded, however, after the prime minister posted an official denial on his Facebook page.

Berlusconi faces a crucial test in Parliament today, with a budget vote that analysts say could underscore just how much support he has lost within his party.

Italy's sheer size (its economy is bigger than Russia's or India's) would test the resources of eurozone nations.

Sensing the urgency, finance ministers from the 17 nations that share the euro vowed on Monday to hash out the details of an expanded rescue fund within weeks, even as analysts suggested that the effort could fall far short.

Financial fears are shifting to Italy 11/07/11 [Last modified: Monday, November 7, 2011 11:06pm]

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