Italian Prime Minister Silvio Berlusconi was fighting for his political survival overnight, as Italy’s borrowing costs reached new highs and investors fretted whether the country was capable of tackling its growing financial crisis.

“Reports of my resignation are without foundation,” Berlusconi declared on Facebook, even though a growing revolt within his centre-right People of Liberty party makes it uncertain whether he is still able to command a parliamentary majority.

Berlusconi, who is expected to go to the Italian Parliament for a budget vote later tonight, has seen his already-thin majority eroded by the defection of several deputies. He also faces a dissident group of about 20 deputies within his party, who are threatening to vote against the government or to abstain in tonight’s critical vote.

Political insiders predict that Italy will likely head to fresh elections if Berlusconi is defeated in tonight’s vote. But even if Berlusconi manages to muster enough support, his grip on power is tenuous. Investors are worried that the Italian leader is no longer capable of pushing through tough austerity measures that would reduce the country’s colossal debt that stands at 120% of GDP.

In Milan, the sharemarket opened sharply lower, but rebounded strongly on rumours that Berlusconi was about to resign. In Paris and Frankfurt, sharemarkets closed lower as investors awaited the end of the Berlusconi regime.

In debt markets, investors continued to shy away from Italian bonds. Yields on Italian 10-year bonds hit a fresh euro-era high of 6.67% overnight, before easing back to 6.54%. The European Central Bank, which has been buying Italian bonds to stop yields from soaring even higher, revealed it spent €9.5 billion ($US13.1 billion) buying eurozone bonds last week, more than double the previous week’s figure.

But the ECB buying is not enough to compensate for the wave of selling, as nervous banks and insurance companies dump their Greek, Italian, Spanish and Portuguese bonds as fast as they can, while citizens in these countries scramble to move their money to safety.

According to the German publication der Spiegel, since the eurozone debt crisis first erupted, ordinary Greeks have withdrawn about €50 billion from their accounts, or a fifth of total deposits. Much of this money ends up in Switzerland, with Greeks holding a reported €280 billion in Swiss bank accounts. There has also been a boom in European property prices, particularly in Berlin and London, as wealthy Greeks snap up second homes.

Now Italians are also getting nervous, according to der Spiegel. Figures compiled by Germany’s Bundesbank and the Italian central bank suggest that more than €80 billion in capital was moved out of Italy in August and September as Italians fretted about their country’s financial plight.

Italy faces the challenge of rolling over €30 billion worth of debt in coming weeks, and investors worry that the country could struggle to raise the €600 billion it needs within the next three years. The trouble is that the Italian government is replacing its old, low-cost debt with fresh borrowings on which it is paying a higher interest rate. According to der Spiegel, every time Italy’s borrowing costs rise by one percentage point, it costs the Italian government €20 billion in the medium-term.

At the same time, the combination of political instability, high taxes and rigid labour markets mean that Italy is becoming a less attractive destination for foreign investors.

In the World Economic Forum’s latest Global Competitiveness Report, Italy ranked 123rd in terms of labour market efficiency — just behind Mozambique. According to der Spiegel, Italy fared poorly because of its rigid restrictions on terminating workers, the absurd length of its legal proceedings, and the increasingly restrictive lending practices of Italian banks.

*This article was originally published at Business Spectator

Peter Fray

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