Italy in limbo after Berlusconi announces resignation

ROME—Prime Minister Silvio Berlusconi’s announcement he will resign threw Italy into political limbo Wednesday amid fears the eurozone’s third largest economy could be the next victim of the debt crisis.

Bowing to a shock parliamentary revolt and unprecedented market pressure, Berlusconi on Tuesday said he would step down once a law with reforms aimed at calming the eurozone turmoil is adopted as expected later this month.

Investors hailed the news with stock rallies in the United States and Asia, but Italian newspapers sounded a more cautious note, warning that the political uncertainty could hurt Italy on the markets.

A European team is now in Italy to check on the implementation of key economic reforms after the EU and IMF put the country under a humiliating surveillance mechanism.

Top-selling daily Corriere della Sera said Berlusconi’s “slow-motion” demise “could introduce a degree of temporary ambiguity that would be destructive for a country exposed to months of financial speculation.”

Leftist daily La Repubblica also emphasized the growing sense of urgency saying: “The country can still be saved if Berlusconi leaves as soon as possible after showing himself to be a source of weakness in the crisis.”

“Italy needs an immediate authoritative government,” it said.

Il Messaggero said: “He should have resigned immediately,” warning that the time lag “exposes us to the risk of more blows from international speculation and from European institutions that already have little trust in Berlusconi.”

Berlusconi, a colorful and controversial tycoon who has been the prominent figure in Italian politics for two decades, has said he would prefer early elections.

But the political course following his resignation will be largely in the hands of President Giorgio Napolitano, who is expected to launch consultations with all political forces.

Other possible scenarios include an expansion of the current center-right coalition with a new leader from Berlusconi’s ranks or a national unity government including the center-left opposition and headed up by a technocrat.

A Senate committee was set to meet Wednesday to discuss the proposed reforms to boost Italy’s virtually stagnant growth rate, including measures to boost competition in the labor market and encourage hiring.

The talks in parliament should also help lay out a timetable for expected final approval of the measures and therefore for Berlusconi’s exit, with the center-left opposition now calling for rapid adoption of the budget law.

Under the current timetable, the measures should be approved by the upper house next week and by the lower house before the end of the month.

Borrowing rates fell on news of Berlusconi’s imminent departure, with the yield on Italian 10-year bonds easing to 6.65 percent in Asia.

The rate was however still perilously close to the 7.0-percent threshold that analysts say could hinder Italian efforts to raise more money.

“The market likes the fact that Berlusconi is going to resign once the austerity package is approved,” said Peter Cardillo, chief market economist at Rockwell Global Capital, a securities firm based in New York.

“That should help relieve some of the market fears but forming a new government might take some time,” he said. “This is a relief for now but the reality is that there might be a real hangover and a price to pay.”

The combination of Italy’s anaemic economic growth rate and 1.9 trillion euro ($2.6 trillion) debt mountain has triggered investor alarm that country could be engulfed in the European debt crisis.

European Union and European Central Bank officials meanwhile arrived in Rome for ministerial meetings as part of a special EU-IMF surveillance mechanism that Berlusconi agreed to at the G20 summit in France last week following intense pressure.

Berlusconi has promised his fellow eurozone leaders to overhaul Italy’s pensions system and accelerate sales of state assets, but the reforms have stalled to the intense frustration of Germany and others.

The 75-year-old prime minister, who has survived numerous scandals during his two decades atop Italy’s volatile political scene, appeared shocked on Tuesday following several defections from his ruling party.

“After the adoption of the stability law, which will contain all the requests made by the eurozone, I will resign,” Berlusconi told the Canale 5 network, which is part of the colorful tycoon’s media empire.

“We have to show the markets that we are serious,” he said.

Berlusconi’s popularity rating has slumped to a record low of 22 percent amid the current crisis and he is currently a defendant in three trials for bribery, tax fraud, abuse of power and paying for sex with a 17-year-old girl.