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Wed 9 Nov 2011 11:43 AM

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Europe debt crisis fells Italy's Berlusconi

Flamboyant billionaire resigns as PM after being stripped of majority in parliament

Europe debt crisis fells Italy's Berlusconi
Italian Prime Minister Silvio Berlusconi. Italy is under pressure to restore its credibility

Italian Prime Minister Silvio Berlusconi became the biggest
political casualty of Europe's debt crisis on Tuesday when he announced he
would step down after being stripped of his majority in parliament.

Berlusconi said he would leave office after parliament
approves a budget law that includes reforms demanded by Europe, which is
struggling to prevent the debt crisis from spreading to the third largest
economy using the euro single currency.

Greece, ground zero of the crisis, is scrambling to win
emergency funds to avert bankruptcy as soon as next month, and political
parties argued over a new coalition government to replace that of Prime
Minister George Papandreou, who has also announced this week that he will step
down.

Berlusconi's imminent departure spells the end of the
flamboyant billionaire media magnate's 17-year dominance of his country. His
failure to implement reforms fuelled a party revolt, and votes on the budget
measures and his resignation could come as soon as this month.

Berlusconi told his own Canale 5 television station that the
only option now was an early election, which could prolong the uncertainty that
has sapped market confidence.

President Giorgio Napolitano he would hold consultations on
the formation of a new government. Napolitano is thought to favour a technocrat
or national unity government for Italy, similar to the solution being put in
place for Greece.

That would please markets that have driven the cost of borrowing
for Italy's government to 14-year highs. Traders pushed the yield on benchmark
10 year Italian bonds to 6.79 percent, a level unseen since 1997.

Such levels effectively make it unaffordable for Italy to
continue to finance its own debt, and are similar to levels that forced
Ireland, Greece and Portugal to take bailouts. Italy, however, is widely
regarded as being too big to bail out.

Berlusconi's government won a key budget vote on Tuesday
after the opposition abstained. But it secured only 308 votes in the 630-seat
lower house, eight short of a majority.

Pier Luigi Bersani, leader of the main opposition Democratic
Party, said Italy ran a real risk of losing access to financial markets.

"I ask you, Mr Prime Minister, with all my strength, to
finally take account of the situation ... and resign," Bersani said
immediately after the vote.

The news that Berlusconi had finally agreed to resign came
after European markets closed but had an immediate positive impact on markets
in the United States. The euro jumped against the dollar and US stocks edged
up.

Earlier, Berlusconi's key coalition ally Umberto Bossi, head
of the devolutionist Northern League, said Berlusconi should be replaced by
Angelino Alfano, secretary of the premier's PDL party. "We asked the prime
minister to stand down," Bossi told reporters outside parliament.

The centre-left opposition said they abstained to lay bare
the weakness of Berlusconi's support while allowing formal ratification of the
2010 budget.

Even when Berlusconi goes, there is no guarantee that
reforms to cut the debt mountain and boost growth will be quickly implemented,
and relief on markets may not last long. There is no agreement among political
parties on either a national unity or technocratic government.

Brussels is putting inspectors in place to help supervise
Italian reform. An EU economic surveillance mission will start work in Rome on
Wednesday.

Finnish Prime Minister Jyrki Katainen said Italy was just
too big to bail out. "It is difficult to see that we in Europe would have
resources to take a country of the size of Italy into the bailout programme,"
he told parliament in Helsinki.

In Greece, the ruling Socialists and the conservative
opposition were labouring to agree on a national unity government, expected to
be headed by former European Central Bank vice-president Lucas Papademos.

The aim is to establish a "100-day" government to
push a €130bn bailout package, including a "voluntary" 50 percent
writedown for private sector bondholders, through parliament before elections
in February.

Papandreou, the son and grandson of prime ministers, said
farewell to his cabinet at the meeting, a participant said. He asked ministers
to tender their resignations.

"Negotiations are being finalised with Papademos as
PM," a Socialist party source told Reuters.

However, some politicians in the opposition New Democracy
party were resisting an EU demand for a written commitment to the new bailout
programme with its harsher austerity measures.

Euro zone finance ministers, meeting in Brussels, agreed on
Monday on a roadmap for boosting the currency bloc's €440bn ($600bn) rescue
fund to shield larger economies like Italy and Spain from a possible Greek
default.

But with bond investors increasingly on strike, there are
doubts about the efficacy of those complex leveraging plans.

In a sign that Italian banks are increasingly shut out of
wholesale money markets, the ECB reported they needed €111.3bn in central bank
funding in October, up from €104.7bn in September and a mere €41.3bn in June.

Even the European Financial Stability Facility, the eurozone's
bailout fund, had difficulty finding buyers for its top-notch AAA-rated paper
on Monday, drawing barely enough bids for €3bn of 10-year bonds issued to
support Ireland.

EFSF head Klaus Regling cited a "very difficult"
market climate and uncertainty about the fund's future profile as factors in
the weak demand.

In Brussels, the 27 European Union finance ministers failed
to agree on how to strengthen banks to cope with the sovereign debt shock without
halting lending to businesses and consumers.

Options on the table included offering state guarantees to
borrower banks or injecting cash into the European Investment Bank, the EU's
project finance arm.