Berlusconi urged to quit as bond yields climb

ROME Mon Oct 31, 2011 4:24pm EDT

Italy Prime Minister Silvio Berlusconi leaves at the end of a meeting in Rome October 28, 2011.  REUTERS/Remo Casilli

Italy Prime Minister Silvio Berlusconi leaves at the end of a meeting in Rome October 28, 2011.

Credit: Reuters/Remo Casilli

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ROME (Reuters) - Prime Minister Silvio Berlusconi faced fresh calls to resign on Monday as markets turned on Italy, pushing its borrowing costs to dangerous new levels on renewed concern about a worsening of the euro zone crisis.

One of Italy's most prominent businessmen, Luca Cordero di Montezemolo, chairman of sports car maker Ferrari, said in a letter to the daily La Repubblica that Italy had reached "the point of no return" and urged Berlusconi to make way for a government of national unity.

Yields on Italy's 10-year, fixed-rate bonds known as BTPs rose to 6.1 percent, a level widely seen as unsustainable in the longer term and close to the level which forced Rome to seek help from the European Central Bank in August.

The ECB kept up its intervention to cap Rome's borrowing costs by buying Italian bonds on the market on Monday but the risk premium continued to rise and 10-year Italian yields ended the day more than 407 basis points above benchmark German Bunds.

The jump in the yield reflected widening market skepticism about measures EU leaders agreed last week to stem the euro zone crisis and underlined Italy's position at the center of an emergency which threatens the entire bloc.

Italian bank leaders said tensions on sovereign bond markets risked raising bank lending costs and hitting companies already complaining about the difficulty in raising cash for investment.

Giovanni Bazoli, chairman of Italy's biggest retail bank Intesa San Paolo, told a conference in Rome the risk of a credit crunch was "inevitable" if tensions on the sovereign debt market continued.

Ferrari's Montezemolo said in his letter "There is not a minute to lose. The savings of Italian people, social cohesion and Italy's membership of the euro are all at risk."

"We do not have time to wait for the natural evolution of the political situation," he said. "The prime minister has to realize that the only way to save the country is through a government of public safety."

The sluggish Italian economy, weighed down by a public debt equivalent to 120 percent of gross domestic product, faces a growing risk of recession next year, which could derail the government aim of balancing the budget by 2013.

Data on Monday showed unemployment in September was 8.3 percent, its highest in almost a year, while the main domestic inflation indicator hit its highest level in three years.

Last week, Italy paid a yield of 6.06 percent at an auction of 10-year bonds, the highest since the launch of the euro more than a decade ago, fuelling growing concern about how it will fund the more than 600 billion euros of bonds it needs to refinance over the coming three years.

SPRING ELECTIONS

Italy, the euro zone's third largest economy, would be too big for euro zone authorities to bail out and EU leaders have been pressing Berlusconi for rapid and far-reaching reforms to cut the deficit and boost growth.

The government faces growing headwinds with attacks from establishment figures like Montezemolo and the Catholic Church and simmering tension at street protests, underlined by the violence seen at a demonstration in Rome on October 15.

On Monday, Labour Minister Maurizio Sacconi warned that subversive "splinter groups" had the potential to mount violent actions of a type seen during the period of ultra-left militancy in the 1970s and 80s.

His comments were immediately dismissed by unions who accused him of making accusations without any proof.

Berlusconi, facing trial on under-age prostitution and tax fraud charges, has rejected previous calls to step down, repeating on Friday that he would serve out his term until 2013 to implement reforms he has promised the European Union.

But there is growing speculation that the government will fall early in 2012, leading to an election in the spring, when Italian elections are traditionally held.

Berlusconi has survived many confidence votes in parliament this year but his Northern League coalition partners, who oppose significant parts of the reform package, have been increasingly and openly doubtful about whether the government can continue.

They have insisted that the only option would be new elections, rejecting the idea of an interim "technical government" led by an independent outsider which would be charged with passing reforms.

If the government did fall after losing a confidence vote in parliament, it would be up to President Giorgio Napolitano to decide whether to call new elections or appoint another prime minister to try to form a new majority.

Senior figures in both the government and opposition say Berlusconi appears to want to keep going for a few months longer hoping that if the government survives into the new year, a new election would be more likely than a new prime minister if he lost a confidence vote.

(Additional reporting by Catherine Hornby, writing by James Mackenzie; Editing by Tim Pearce)

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