Berlusconi's resignation fuels market hopes for eurozone

 

Markets are expected to react strongly tomorrow to the confirmation that Silvio Berlusconi has been replaced by Mario Monti as Prime Minister of Italy, following a crunch parliamentary budget vote yesterday.

Italy's cost of borrowing has risen dramatically under Mr Berlusconi in recent weeks, with the 10-year bond yield crashing through the 7 per cent barrier on Wednesday. This is the level that triggered bailouts in Greece, Ireland and Portugal.

But this fell back to 6.51 per cent by Friday, following the news that Mr Berlusconi would resign this weekend. There are hopes that the yield will be driven down further tomorrow, as the market reacts well to Italy's budget cuts and the appointment of Mr Monti, a former European Union commissioner.

Yesterday, the president of the European Central Bank (ECB), Mario Draghi, met Mr Monti before he took his place as head of the eurozone's third biggest economy. The ECB and the International Monetary Fund (IMF) are closely monitoring Italy's finances, fearing that the country, with €1.9trn (£1.6trn) of debt, is too big to bailout.

Yesterday, the IMF's head, Christine Lagarde, praised the efforts of Greece and Italy in the past two weeks to restore some sanity to their finances. She said: "What we wanted at the IMF was political stability and a clear policy in both countries. I believe that significant progress has been made."

Italy is not the only focus of the EU's attention this weekend. Rating agency Standard & Poor's has put Hungary's credit rating on "negative surveillance". This means that the country's rating is likely to be downgraded soon.

There are still concerns over Spain, with its high unemployment and a 10-year bond yield of 5.84 per cent. The UK's bonds remain fairly strong at 2.58 per cent, reflecting the market's approval of the coalition's austerity measures.

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