After Greece, Italy Could Be Next Focus for Markets

The eyes of the world have been trained on Greece for most of this week, but, as the Hellenic crisis approached breaking point, signs are that Italy will be the next focus.

Panoramic Images | Getty Images Piazza Venezia, Rome, Italy

"The whole stability of Europe depends on whether Italy gets its act together," Commerzbank Chief Financial Officer Eric Strutz told analysts in a conference call on Friday.

Prime Minister Silvio Berlusconi's élan was dented Thursday after he was forced to accept International Monetary Fund (IMF) oversight of Italy's progress in implementing austerity measures at the Group of 20 nations (G20) meeting in Cannes, France.

While the move calmed markets slightly, there are plenty of warnings that the Italian problem has not gone away.

Yields on Italian 10-year, fixed-rate bonds rose toward record levels on Friday.

Berlusconi has already survived more confidence votes than his Greek counterpart George Papandreou has had plates of moussaka.

Analysts at Unicredit, Italy's largest bank, believe he may call another soon, and that a new interim government could be formed if he doesn't win the support of parliament.

"Berlusconi seems inclined to call for a confidence vote," the analysts wrote in a research note. "We see chances that, besides the...dissidents, also a large part of the ruling coalition...might decide to support this interim government."

While Italian households have a relatively low level of debt, unlike other troubled European economies, the country still has the highest debt-to-GDP ratio in the euro zone outside of Greece and deep-rooted structural problems.

"After Greece, the next issue is Italy," Patrick Legland Global Head of Research, Societe Generale, told CNBC Friday. "We will have an issue with Italy at some point and all this will come back onto the agenda. You should remain risk off on Italy."

The key issues which a new government needs to address include a large-scale privatization plan and reform of the labor market.

"Policy decisions on: 1) growth-enhancing structural reforms; and 2) reducing the stock of debt through a large privatization plan are essential for a change in market sentiment," analysts at Barclays Capital wrote in a note.