Italy Rocked As Cost Of Borrowing Soars

Italy's borrowing cost has soared to a record high despite Silvio Berlusconi's promise to step down as prime minister after losing his parliamentary majority in a crucial budget vote.

Mr Berlusconi had said he wanted to show the world the country was "serious" about tackling its huge debt burden.

But on Wednesday morning Italy's 10-year government bond yield - the rate the country pays in interest to borrow money - rose above 7% for the first time since it joined the euro.

President Giorgio Napolitano called for an immediate commitment to economic reforms to restore confidence in jittery financial markets.

Bond yields of more than 5% are considered unsustainable in the long term.

Greece , Ireland and Portugal officially sought emergency funding when their 10-year bond yields breached 8%.

For all three 7.3% was the point of no return. Once the bond yields rose above that level they did not come down again.

The European Central Bank (ECB) was reportedly buying Italian bonds on Wednesday to drive the yields down.

If Italy should default on its debt it would plunge the economy into a sharp downward spiral and possibly trigger a Europe-wide recession.

Italy's economy is twice as big as Greece, Portugal and Ireland's combined and a bailout would be beyond the eurozone's means.

Speaking at Prime Minister's Questions , David Cameron said the Italian rate was "unsustainable" and warned eurozone leaders they needed to agree on the size of the European bailout fund, the EFSF .

"If you don't have credibility about your plans to deal with your debts and deal with your deficits, whether you like the markets or not, they won't lend you any money," he said.

"That's what we're seeing in countries like Greece and now tragically in Italy, where the price of borrowing money is getting to a totally unsustainable level."

He added: "In terms of Europe, the problem of contagion is that, as we agree a decisive write-down of Greek debt, people inevitably start asking questions about other countries.

"As that happens, you need to have in place the biggest possible firewall.

"That is what the EFSF is all about. And eurozone leaders urgently need to put flesh on the bones, to put figures on the size of that firewall to stop this contagion from going any further."

UK banks currently hold £10.9bn worth of Italian government debt, according to the Bank of International Settlements.

French banks are owed more than 20 times that amount, with £216bn on their balance sheets.

That is equivalent to over half of all European bank lending to Italy and twice Germany's exposure.

The development in Italy comes after Mr Berlusconi agreed to resign - but not until his economic reforms are approved by parliament, which could take several weeks.

Although the media tycoon won the budget vote in Italy's lower house on Tuesday he lost his majority in the process.

There was a mass abstention by opposition MPs and 11 of his own supporters, who he bitterly labelled as "traitors".

Following the dramatic events, Mr Berlusconi went to see President Napolitano to explain what had happened and inform him he would step down after the reforms were passed.

Mr Berlusconi's budget proposals are based on pledges he made at the G20 summit in Cannes last week.

The measures include an increase in the retirement age and widespread job cuts to reduce Italy's debt.

However, many commentators believe it will not be enough to stop the country from defaulting on its massive 1.9 trillion euro (£1.62 trillion) debt - or 120% of its GDP.

Speaking on TG5, a news programme on one of his numerous TV stations, Mr Berlusconi said: ''I see only the possibility of elections. Parliament is paralysed.''

Mr Berlusconi, a highly controversial figure, has been prime minister three times since entering politics in 1994.

But in recent months he has been hit by a series of sex scandals involving underage girls at his infamous 'bunga bunga' parties and escorts at his official residences.

He is also currently involved in four trials with charges ranging from having sex with an underage prostitute to abuse of office and perverting the course of justice.

Many believe he has been spending too much time focusing on his court cases at the country's expense.