Italy’s borrowing cost hits record

Investors fear that Italy could become the next victim of the debt crisis amid worries that Mr Berlusconi would linger in office and delay reforms.

In an attempt to calm markets, the country’s President Giorgio Napolitano said reforms would be passed and Mr Berlusconi would resign “within a few days”.

Mr Napolitano issued a statement intended to “dispel any doubt or misunderstanding” over the timing of Mr Berlusconi’s departure from office.

“Within a short time either a new government will be formed which can take any further decisions needed with the support of parliament or parliament will be dissolved and an election campaign will begin within the tightest time frame,” he said.

Mr Berlusconi has pledged to resign after the Italian parliament passes the financial reforms that European officials have been demanding for months.

The process can take up to two weeks, but Mr Napolitano said that would be accelerated to days, allowing him to quickly begin talks on forming a new government or calling new elections. “Fears are totally unfounded that Italy may experience a long period of inactivity,” Mr Napolitano said, adding that “emergency measures” could be adopted at any time.

He was speaking as Italy’s key borrowing rate hit a high of 7.40 per cent, above the seven per cent level widely viewed as unsustainable. That level was the point at which Portugal, Greece and the Irish Republic were forced to seek a bailout.

The borrowing rate eventually settled down to 7.26 per cent after Mr Napolitano’s remarks.

This yield on Italian government debt is the highest since the euro was founded in 1999.

In comparison, Germany’s cost of borrowing for 10 years is 1.73 per cent.

In another chaotic day driven by the European debt crisis, the Dow Jones industrial average dropped in New York after Italy’s borrowing costs soared to a new record high. It closed 389.24 points down at 11780.94.

Traders were troubled by signs that the crisis was enveloping Italy – the eurozone’s third-largest economy and held to be too big for Europe to bail out.

Economic Affairs Commissioner Olli Rehn called the situation in Italy “very worrisome”.

With debts of £1.6 trillion, higher borrowing rates will make it more difficult and expensive for Italy to roll over its debts.

The European Central Bank has been buying up Italian bonds to keep yields at reasonable rates but critics say that is just throwing good money after bad.

Italy needs to pass the additional austerity measures and structural reforms pledged by Mr Berlusconi to world leaders at an economic summit last week.

Any delays in the financial reforms or in establishing a new, stable Italian government frighten the markets.

Investors fear a so-called “haircut” could also affect those owning Italian bonds if Italy does not get its act together.

In the meantime, there is considerable uncertainty of what kind of government will follow.

While Mr Berlusconi is not running for office again, he said he would remain active as the founder of his political party and would help out in any political campaigns.

Mr Berlusconi wants new elections soon with his hand-picked successor, former justice minister Angelino Alfano, as a candidate.

The 75-year-old leader tapped Mr Alfano to head his People of Liberties Party a few months ago. At 41, he represents a new generation of centre-Right politicians after 17 years of Berlusconi leadership.