Italy's debt crisis reaches breaking point

Italian borrowing costs reached breaking point on Wednesday after Prime Minister Silvio Berlusconis insistence on elections instead of an interim government opened the way to prolonged instability and delays to economic reform, Reuters reported.Italian 10-year bond yields shot above the seven per cent level that is widely deemed unsustainable, reflecting investors concerns that they may not get their money back and prompting German Chancellor Angela Merkel to issue a call to arms.Merkel said Europes plight was now so unpleasant that deep structural reforms were needed quickly, warning the rest of the world would not wait. That will mean more Europe, not less Europe, she told a conference in Berlin.She called for changes in EU treaties after French President Nicolas Sarkozy advocated a two-speed Europe in which euro zone countries accelerate and deepen integration while an expanding group outside the currency bloc stayed more loosely connected -- a signal that some members may have to quit the euro if the entire structure is not to crumble.It is time for a breakthrough to a new Europe, Merkel said. A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply cant survive,she added.Portugal and Ireland were forced to seek EU-IMF bail-outs when their borrowing costs reached similar levels and clearing house, LCH Clearnet, sounded another alarm by increasing the margin it demands on debt from the euro zones third largest economy, effectively raising the cost of holding Italian bonds.The European Central Bank, the only effective bulwark against market attacks, wasted no time intervening to buy Italian bonds in large amounts.The ECB is buying aggressively, one trader said.Italy has replaced Greece at the centre of the euro zone debt crisis and is on the cusp of requiring a bail-out that Europe cannot afford to give. Unlike Greece, an Italian default would threaten the entire euro project. EU treaty changes could take a year or more. Rome does not have that much time.Having lost his majority in a key parliamentary vote, Berlusconi confirmed he would resign after implementing economic reforms demanded by the European Union, and said Italy must then hold an election in which he would not stand.
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