Italian prime minister Silvio Berlusconi failed to win a majority in a budget vote Tuesday and agreed to step down once the country adopted economic reforms.
The move makes Berlusconi the highest profile political victim of the two-year old European debt crisis. The colorful prime minister, known for his wild parties and legal troubles, begins his exit as yields on Italian bonds reached yet another high of 6.76 percent.
Ireland and Portugal were laid low by similarly high interest rates and ultimately took financial bailouts. But Italy — the world’s 11th largest economy — is seen as too big of a bailout for the Eurozone to manage.
“While Italy is solvent, sustained interest rates at above 7 percent over several quarters and next-to-zero GDP growth could start to turn the debt dynamics negative and ultimately into an insolvent position,” said Jan Randolph, head of sovereign risk at forecasting firm IHS Global Insight in an analysis.
Randolph said interest rates could fall with Berlusconi out of office.
More certainty surrounding Italy, which has recently taken center stage in the debt crisis, could help stabilize the situation as European Union leaders put in place a broader plan to right the region’s finances.
The European markets made modest gains for the trading day, which ended before Berlusconi pledged to step down. Paris’ CAC 40 led the pack with a 1.3 percent rise, followed by London’s FTSE 100 in London, which climbed 1 percent. Milan’s FTSE MIB advanced 0.7 percent and Frankfurt’s DAX was up 0.6 percent.
Among the stocks losing ground were Arcandor, which tumbled 6.2 percent; Safilo Group, which sank 7.7 percent, and Aeffe, which fell 5.2 percent. The day’s biggest gainers included Hugo Boss, which rose 4.9 percent after the company significantly raised medium-term profit and sales guidance. Compagnie Financière Richemont was up 3.3 percent while Luxottica Group rose 2.2 percent. PPR, which announced its purchase of Brioni on Tuesday, saw its shares rise 2.4 percent.
In the U.S., the S&P Retail Index rose 1.2 percent, or 6.47 points, to 549.64, as the Dow Jones Industrial Average picked up 0.8 percent, or 101.79 points, to 12,170.18. Among the advancers were Wal-Mart Stores Inc., up 2.4 percent to $59.32; Nordstrom Inc., 1.1 percent to $51.20, and Ralph Lauren Corp., 1.1 percent to $159.05.