The government successfully passed a usually routine finance bill yesterday, but only because the opposition Democratic Party abstained. Berlusconi lost his majority in the process, triggering calls for his departure.
The euro bounced back on news of the announcement, touching $1.384, a spike on the day’s trading of around 0.5 per cent.
Markets have previously reacted favourably to rumours of Berlusconi’s resignation, as he has failed to reform Italy’s public finances and slow economy.
Austerity measures could be passed as soon as mid-November, at which point he would be expected to resign, although the legislative process so far has been slow and unpredictable. Continued uncertainty over Berlusconi’s ability to secure these all-important reforms has driven investors away from Italy.
Earlier in the day yields on 10-year bonds peaked at 6.77 per cent, creeping perilously close to the highly significant seven per cent mark, beyond which Portugal and Ireland were forced to seek bailouts as they could not support their debts.
Five-year credit default swaps on Italian debt rose by 1.62 per cent, reflecting increased perceived risk of a default.
However, analysts worry that Berlusconi’s departure may not bring any more certainty than his shaky premiership.
“It might lift sentiment for a while, but it is not obvious his successors would do any better,” said Dario Perkins, an economist at Lombard Street Research.
“Italian governments are always fragile and fractious and the economy’s problems are deep and structural. Significant parts need a complete overhaul and this would be politically difficult even for the strongest Italian government – which history suggests is virtually an oxymoron.”
Although negotiations could take place between existing parliamentary parties to form a government, Berlusconi told Italian TV station Channel 5 that he wants early elections to be held.
The political chaos was again mirrored across the Ionian sea, as an internal row in conservative ranks hindered a deal to form a Greek coalition led by Lucas Papademos, the former European Central Bank vice president. Bickering continues to prevent a quick resolution in Greece, where the EU wants the latest bailout deal pushed through before fresh elections.