Berlusconi Forced Out of Office as Italian Economy Threatens Another Bailout

The FTSE 100 fell down to 1.9% to 5,460.28 last night, while the Dow Jones fell 3% as nightmares of Italy’s impending exit from the Euro become reality yesterday.

News of Italy’s possible exit from the Euro has created an entirely new breed of chaos – effecting share prices, trading volume and exchange rates all of the world.

Italy represents the 3^rd biggest economy in the Eurozone (after Germany and France).  It’s thought that unlike smaller economies such as Greece, Portugal and Spain, Italy’s exit from the Euro could bring the entire currency to collapse.

While Italian Prime Minister Silvio Berlusconi promised to step down from office last Tuesday, the rise of interest rates up to 7% in Italy forced a vote of no confidence in the Prime Minister, meaning he could be forced to step down by Saturday.

Why is Italy Panicking Over Higher Interest Rates?

The reason that investors are starting to panick about Italy is because last night their interest rates rose up to 7% - the same level that forced Portugal and Ireland to seek bailouts.

The 7% interest rates, in other words, are the cost of borrowing for the government.  At 7%, it means that Italy would have to spend 20% of their annual GDP (i.e. 1 in every 5 Euros spent in Italy) on servicing debt, which is completely unsustainable.

The jump in rates was caused both by a political upheaval in Rome and the clearinghouse’s decision to impose higher charges on those trading in Italian bonds.

That’s why Italian politicians and leaders of the financial markets (including Eurozone leaders such as Angela Merkel, Nicholas Sarkozy and Mario Draghi – President of the European Central Bank) are so keen to push through austerity measures in Italy.  In response to this, Berlusconi has stated that he would step down from the role that he has occupied for half of the last 17 years).  He would become the 2^nd European leader to step down this month, after Greek Prime Minister George Papandreou stepped down yesterday.

While the UK Prime Minister David Cameron told the public that Italy’s debt has reached unsustainable levels, some economic analysts are worried that France could be next to be engulfed by the crisis.

In order to protect his own economy, the David Cameron is exploring ways to safeguard Britain from a tightening of trade from Euro Zone countries which decide to exit the Euro.  The price of gold has reacted to these changes by increasing 7% up to $1,772 this month, and that could break the $1,800 resistance levels that we saw last August if Italy continues to threaten a serious bailout.