© The Associated Press / Andrew MedichiniItalian Premier Silvio Berlusconi holds a note he wrote during Democratic party leader Pierluigi Bersani's speech, the note reads: "308, -8 traitors; Government upturn; Vote; Take note; Resignation; Italian President; One solution; Let's move", prior to the start of a voting session at the Lower Chamber, in Rome, Tuesday, Nov. 8, 2011.
In another chaotic day driven by the European debt crisis, the Dow Jones industrial average in New York dropped nearly 240 points in morning trading after Italy's borrowing costs soared to a new record high. Traders were troubled by signs that Europe's unending debt crisis was enveloping the eurozone's third-largest economy.
And across the Adriatic Sea, outgoing Greek Prime Minister George Papandreou announced that an agreement had been reached with the opposition to create an interim government to pass the country's new debt deal. Papandreou, who was expected to formally resign with hours, wished the next prime minister well but gave no indication of who it would be.
Berlusconi has pledged to resign after parliament passes the financial reforms that European officials have been demanding for months. The process can take up to two weeks, but President Giorgio 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," Napolitano said, adding that "emergency measures" could be adopted at any time.
Italy's key borrowing rate spiked to a high of 7.40 percent on Wednesday, up 0.82 percentage points from the previous day, as markets expressed concern about how swift and complete the political transition would be. That's over the level that eventually forced other eurozone countries like Greece and Portugal to seek bailouts.
They settled down to 7.26 percent after Napolitano's remarks.
Analysts said the markets whipped up a catastrophic scenario to make sure Berlusconi leaves.
"Berlusconi is the supreme political maneuverer. And no one will believe he has resigned until, yes, he has done so. Simple as that," said Jan Randolph, head of sovereign risk analysis at IHS Global Insight.
No one is suggesting that Italy is headed for an immediate bailout. Randolph said it will take a while for the higher borrowing rate to cause problems for Italy's "mountain of debt."
"With a catastrophic scenario - and it seems we are facing now a catastrophic scenario - maybe Berlusconi can be pushed to support a new government. Or maybe his party will crumble," said Roberto D'Alimonte, a political analyst at Rome's LUISS University.
Noted economist Nouriel Roubini, who has lived in Italy, expressed a similar view on Twitter: "Yields at 7%: markets are telling Berlusconi to leave NOW. They don't buy his scheme of pretending to leave in 2 weeks after budget is passed."
D'Alimonte said the markets want a technocratic government, led by former EU competition commissioner Mario Monti, who now runs the prestigious Bocconi University. Berlusconi and his allies claim such a solution would be undemocratic, however, because the conservatives won the last election.
With debts of around euro1.9 trillion ($2.6 trillion), Italy is considered too big for Europe to bail out. Higher borrowing rates will make it more difficult and expensive for Italy to roll over its debts. It has over euro300 billion ($412 billion) to raise in 2012 alone.
The European Central Bank has been buying up Italian bonds to keep yields at reasonable rates - but Randolph said that is throwing good money after bad.
"You can bring yields down, but they can't keep them down unless the borrowing government takes concrete steps to improve creditworthiness," Randolph said. "Seven percent is not sustainable over several years. It has to be brought down eventually."
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