Italy Faces More Turbulence Despite Planned Berlusconi Exit

Italy faced yet another day of volatility Wednesday despite the much-anticipated planned departure of Prime Minister Silvio Berlusconi, after yields on its debt were predicted to rise dramatically.

CNBC

The longest-serving Italian Prime Minister since the Second World War has survived multiple confidence votes and scandal about his personal life, but the economic crisis threatening Italy appears to have finally claimed his scalp.

On Tuesday, he promised to leave office as soon as the austerity measures agreed with the European Union were passed by Italy's government.

The Italian yield curve has inverted, with yields on two year and five year debt rising above the 10 year yield.

Italian bond yields are likely to shoot up across the board again after clearing house LCH.Clearnet SA raised the initial margin call applied to Italian debt by between 3.5 and 5 percentage points across the board.

The clearing house said in a statement on its website that the initial margin call on 7- to 10-year debt will go up by 5 percentage points to 11.65 percent at the market close Wednesday and will impact on margin calls from Thursday.

The margin call will lead to a less healthy primary market for Italian government debt, Jim McCaughan, chief executive of Principal Global Investors, told CNBC Wednesday.

Yields on 10 year Italian bonds are already climbing closer to the key point of 7 percent, which could make Italy's debt repayments unsustainably expensive.

"This is one more move that makes it even more difficult for Italy to roll over its debt next year," McCaughan said. "It shows the Italian authorities that they're in a dangerous market. Investors are likely to respond to this and probably buy less debt at a reasonable price."

There are several candidates whose names are in the frame to succeed Berlusconi. Mario Monti, the former European competition commissioner, who is well-respected internationally, could head a temporary technocratic government.

"There are a lot of experienced technocrats in Italy – that's one of the things they do very well," Tina Fordham, MD and senior political analyst at Citi, told CNBC Wednesday.

Gianni Letta, 76, Berlusconi's cabinet under-secretary who is known as a skilled behind-the-scenes fixer, has also been mentioned as a potential successor.

Angelino Alfano, the 41-year-old former justice minister, believed to be favored by Berlusconi, could be tainted by his links to the Berlusconi government. He brought in a law, later scrapped, which helped shelter the prime minister from trials.

Roberto Antonione, one of the MPs in Berlusconi's government who publicly rebelled against him, told CNBC that he thinks the best way forward is to form a new government from within the existing coalition.

"We have to face the difficulties in front of us," he said. "All the politicians have to understand this and do everything to solve this problem. We have no other possibilities so we must do it."

He added that Italy should also try to do everything asked of it by the European Commission.

"When you have got this kind of pressure it will touch the banking sector across Europe," Marcello Zanardo, senior research analyst at Sanford Bernstein, who favors a technocratic government led by Monti, told CNBC Wednesday.

"A technical government is the best solution at the moment. You can blame the guy from abroad to implement what you need to do, and find a political consensus over time."

"In the meantime, you have someone from outside who knows the country extremely well, who is well respected internationally, and who will sort it out," he added.