Market pressures grew on Italy, the debt crisis' new front, on Monday due to fears Premier Silvio Berlusconi might be unable to enact economic reforms he promised to fellow European leaders in exchange for help to protect his country from financial turmoil.
The fate of Italy is crucial to the wider 17-nation eurozone because it is the region's third-largest economy and would be too expensive to bail out if its borrowing rates rose so high as to block it out of bond markets.
On Monday, Italy's benchmark 10-year bond yield rose above 6 percent, almost three times as high as Germany's and an indication of waning investor confidence in the country's financial prospects.
European leaders agreed last week to boost the firepower of their bailout fund to make it able to protect the bond markets of countries like Italy. The fund would insure a part of the country's bond issues to make them attractive to investors. In exchange, Berlusconi had to promise Italy would pull its own weight to fix the debt crisis, and promised much-needed measures to revive growth.
The fact that Italy's bond yields are rising again is a worrying sign that Berlusconi lacks the confidence of international markets. Crucially, it could already undo the optimism created by the European plan.
"Investors that enable Italy to live beyond its means are increasingly turning away from funding the country (or at least demanding more interest)," Louise Cooper, markets analyst at BGC Partners, wrote in a note to clients.
"This is leaving Italian interest rates at unsustainably high levels given that the country has a debt to GDP ratio of 120 percent and a euro1.6 trillion ($2.2 trillion) debt mountain. Time to forget Greece, Italy is the most scary guest at this eurozone Halloween party."
Some investors worry that the European Central Bank may want to slow down further its government bond-buying program, which had been keeping Italy's borrowing rates down this year. The central bank has been reluctant to keep the program going because it does not like being seen as propping up profligate governments. But with the details still pending on how the eurozone bailout fund will take over the job of protecting sovereign bond markets, the ECB appears stuck with the program for now.
Above all, the market fears center on Italy's domestic problems, with Berlusconi facing an increasingly divisive political climate.
A major rally planned for Saturday in Rome is expected to draw tens of thousands to protest plans to make it easier to fire workers — a plank in Berlusconi's strategy to help business meet international competition by loosening rigid labor laws.
Berlusconi's welfare minister Maurizio Sacconi was bitterly criticized by unions Monday after suggesting on a TV show that attempts to change the labor laws could bring on a new wave of terrorism from left-wing fringe groups. He cited the 2002 assassination by left-wing gunmen of a government labor adviser who had been working on reforms.
"The country is tired, workers, businesses and families want to be able to plan their futures with hope and instead are forced to pay an ever-higher 'Berlusconi tax,'" said Marina Sereni, vice president of the opposition Democratic Party.
Italy has in the past been able to meet its overall debt, which stands at 120 percent of gross domestic product but could be dragged into crisis should markets loose all faith and send interests rate up.
Berlusconi has set a time frame to begin rolling out the measures promised European leaders last week and in an earlier austerity package approved over the summer, which aimed at reducing the deficit by more than euro54 billion ($70 billion) over three years through budget cuts, tax hikes and changes to Italy's costly pension system.
He will go before Parliament on Nov. 9 and Nov. 10 to present "the commitments made with Europe and the measures for growth."
Over the next few months, the government is promising to help young people obtain mortgages, fight youth unemployment and liberalize the services sector.
By the end of June the government will present an amendment to the constitution requiring a balanced budget — a key Berlusconi promise. This is a long process, requiring a second approval by parliament six months later.
The road ahead is filled with pitfalls. Involved in three trials for alleged corruption, tax fraud and the embarrassing accusation of paying for sex with a minor, the 75-year-old Berlusconi faces repeated calls to resign by the opposition. He denies the charges, claiming he is a target of leftist prosecutors.
Already Berlusconi's parliamentary majority is thin and he has been forced to resort to confidence votes to enforce party discipline among his increasingly restive coalition partners.
His chief ally Umberto Bossi, the charismatic leader of the Northern League, openly questioned Berlusconi's promises to the European leaders to raise the retirement to 67 to put it in line with Germany. The media speculated last week that the government was about to fall.
Berlusconi went on TV to deny that and insisted he would govern until his term ends in 2013.
"Bossi is a faithful ally. He thinks like I do. Everything else is a dream," he told Italy's leading newspaper Corriere della Sera.
But even Italy's industrialists, once big backers of media mogul Berlusconi, have openly said they have soured on his leadership, and claim his center-right government, in office since spring of 2008, has done little to encourage economic expansion.