A defiant Silvio Berlusconi clung on to power last night, dismissing calls for his resignation as bond yields rocketed to euro-era records and markets see-sawed on rumours he was set to resign.
Yields on Italian bonds soared to 6.68 per cent, higher than the levels seen in August, when the European Central Bank restarted buying bonds to lower borrowing costs.
The 14-year high stoked fears that Italy is approaching the point at which its debts will become unsustainable.
Thursday’s sale of three-month debt was cancelled yesterday, as fears grew that Italy may soon be at a point where either no investors will be prepared to take the risks required to lend Italy money, or Italy will become unable to pay its debts.
“The European Financial Stability Facility (EFSF) needs to be a lot bigger to convince investors that it can withstand an Italian default, and it also needs to make clear where its funding will come from,” Simon Hill, head of investment research at Buck Consultants, told City A.M.
A crucial budget vote takes place today, and hopes that a new government might take more action on implementing the budgetary discipline demanded by the EU and IMF helped markets move off lows.
Rumours spread yesterday morning that Berlusconi was about to resign, after a meeting in which leaders within his own party were reported to have urged him to go.
Investors cheered the possibility of Berlusconi’s departure, with the FTSE and other European indices rising by close to one per cent on hopes of a resignation.
However, Berlusconi took to Facebook to deny the suggestions, writing “Rumours of my resignation are groundless” on his official page, quickly deflating the bubble.
The FTSE 100 ended the day down 0.3 per cent, the DAX was down 0.63 per cent and the CAC 40 finished down 0.64 per cent. The VIX index rose 0.265 per cent to 30.240.
Economists feared that the political situation was impacting more strongly on markets than any fundamentals, highlighting the importance of finding a real resolution to the debt problems afflicting the peripheral Eurozone economies and Italy.
“The mere fact that you have equity markets rallying on speculation that the Italian Prime Minister was to resign today shows that investors have little confidence in Berlusconi’s ability to address and contain Italy’s debt problems,” said Joshua Raymond, chief market strategist at CityIndex.