Silvio Berlusconi will step down as promised, says president

 

The prospect of an Italian government led by leading economist Mario Monti helped calm market jitters today.

Traders had been fearful that the country was heading for a Greek-style economic crisis that would threaten the very existence of the euro.

With a groundswell of Italian politicians voicing support for a technocratic government led by the former European Union competition commissioner, there is a growing degree of confidence that the transition from Silvio Berlusconi will be swift.

As in Greece, where economist Lucas Papademos was appointed prime minister, there are hopes that Mr Monti's experience of global financial circles and his non-involvement in his country's partisan politics will help calm markets.

Italy's ten-year borrowing rate slid sharply and back towards levels that are considered manageable - for now.

Yesterday, the rise in the country's ten-year bond yield to well over 7 per cent stoked panic in financial markets that Italy was heading the same way as much-smaller Greece, Ireland and Portugal in needing to outside help.

Mr Monti has become favourite to lead Italy out the financial morass after Wednesday's surprise move by President Giorgio Napolitano's to name him a senator for life.

Mr Napolitano also offered emphatic assurances to skittish investors that Mr Berlusconi will step down, as promised, after reforms are passed - likely by Saturday.

In what may bode well for a smooth transition, Mr Berlusconi congratulated Mr Monti on his new post in a telegram, wishing him "fruitful work in the country's interest" and recognising his accomplishments.

Italy is under intense pressure to prove it has a strategy to deal with its debts, which stand at 1.9 trillion euro (£1.62 trillion), or a huge 120 per cent of economic output - it has to rollover a little more than 300 billion euro (£255 billion) of its debts next year alone. But economic growth is weak and the government failed to enact reforms to revive it over the past decade.

With the eurozone and global economies at risk in the event of an Italian default, European governments are pushing Italy to clear up questions over its political leadership quickly.

European Council President Herman Von Rompuy, will hold talks with the premier on Friday night, Mr Berlusconi's office said. His visit to Rome was scheduled before Mr Berlusconi's pledge to resign.

If MPs stick to their timetable, the Italian government's so-called "stability" measures should have won approval in the Senate by Friday evening and be on their way for final passage on Saturday in the Chamber of Deputies.

Germany's Chancellor Angela Merkel told reporters in Berlin that "it is very important ... that Italy wins back its credibility.

"That means the austerity package being implemented very quickly, as is now the plan, and above all the political leadership being clarified as quickly as possible - because I think that is very important for Italy's credibility," she said.

Investors are worried that if Italy's borrowing rates remain too high for too long, it will be blocked out of financial markets and need rescue loans to repay its bondholders. That could be devastating for both the euro and the global economy.

Europe has already bailed out Greece, Portugal and Ireland - but together they make up only about 6 per cent of the eurozone's economic output, in contrast to Italy's 17 per cent.

Political sentiment appeared to be building in favour of a government of technocrats headed by Mr Monti.

The elegant, gray-haired Monti, 68, made his reputation as a strong-willed economist when as EU competition commissioner he blocked General Electric's takeover of Honeywell. He currently heads Milan's prestigious Bocconi University.

Mr Napolitano, who is charged with selecting a candidate to form a new government, will want to ensure the new administration enjoys broad support in parliament so it can not only get reforms passed but also implemented.

Mr Berlusconi's party remained split on whether to support Mr Monti although some key elements have signalled support.

Foreign Minister Franco Frattini said early elections would not help the country solve its economic problems - a clear message to a group within Mr Berlusconi's party that is pressing for a vote.

The allied Northern League, Mr Berlusconi's key coalition partner, were staunchly opposed, while the main opposition parties appeared willing to accept Mr Monti.

Despite the lack of clarity over Italy's political future, the government easily sold five billion euro (£4.25 billion) in 12-month bonds at an interest rate of 6.087 per cent. Though that is up sharply from 3.57 per cent in the last such auction last month, it was well below analyst expectations of 7 per cent. Demand for the bonds was also strong, almost twice the amount on sale.

The European Central Bank has been buying up Italian and Spanish bonds in the secondary markets to help keep borrowing rates from becoming unsustainable.

Whatever the composition of the next government, there are no quick easy fixes to Italy's debt problems.

In Brussels, the European Union emphasised that Italy is unlikely to fulfil its promise of balancing its budget by 2013 if recently promised austerity and reform measures are not implemented.

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