In the topsy-turvy world of Italian politics, it's a rare event that can be summarized in anything as short as a paragraph, let alone something as simple as a thin jagged line. And yet, on Monday, there it was: an entire day's drama over the possible resignation of the country's flamboyant Prime Minister Silvio Berlusconi condensed into an easy-to-comprehend, unmistakable graphic. For a few hours, at least, those looking to follow the fate of the Italian government (and Europe, for that matter) could forget about backroom political machinations in Rome and simply watch the peaks and plunges of the yields of Italian government bonds.
Bond yields, a measure of what a government will need to pay to roll over its debt, offer a solid indication of how investors are regarding a country's economy. During good times, when the money is sure to be paid back, yields will be low. When a country hits a rough patch as Greece, Portugal and Ireland did earlier this year they can soar so high that a country becomes unable to pay what it owes.
Italy's cost of borrowing has been rising steadily since July, as worries have increased that the country's growth will prove too anemic to sustain its level of spending. The European Central Bank has stressed its commitment to shoring up Italy's finances, but the country's neighbors have also demanded it carry out a series of painful economic reforms. What's less clear is whether Berlusconi's government, weakened by infighting and scandal, will be capable of passing measures that would be difficult to push through Parliament by the strongest of Prime Ministers. "Financially, the economic situation is much worse in Spain," says Franco Pavoncello, a political scientist at Rome's John Cabot University. (Italy, for example, is not running a particularly large budget deficit, which is at 4% of GDP, compared with Spain, which was at more than 9% at one point.) "But politically, it's somehow been resolved [in Madrid]." What drives the cost of Italian bonds is simply a question of politics. "Markets go where they see weakness," says Pavoncello. "And today they see weakness in Italy."
And so when Monday morning began with a sudden leap in bond yields, the world started to pay attention. It had been a long, eventful weekend, following a tumultuous week, for Berlusconi's government. With the political drama in Greece serving as a backdrop, the increasingly embattled Prime Minister watched members of coalition fray away. By Sunday night, there had been three defections from his already weakened parliamentary majority. Others in his party were calling openly for his resignation, and close allies were speculating about the collapse of the government and new elections as early as January.
And so, it wasn't too much of a surprise that yields shot up in a steep climb as soon as the markets opened. By 9:30 a.m., the situation was turning critical. The yield on 10-year bonds had risen to 6.64%, their highest since the introduction of the euro in 1999 and close to the levels that pushed Greece, Portugal and Ireland into requiring emergency bailouts. Yields continued to hover at just-below-record levels, while Berlusconi was said to be consulting with his family and close friends about his future. Then, as rumors began to trickle out that he had decided to resign, the market pressure suddenly eased. "It's a question of hours, some say of minutes," wrote Giuliano Ferrara, a close ally and former spokesperson for Berlusconi, at about 11 a.m. on the website of the newspaper he edits.
The reprieve lasted about two hours. Yields sank back down to regain about half their territory before stabilizing while the markets waited for confirmation. Instead, at about 1 p.m. came the denial: "The rumors of my resignation are without foundation," Berlusconi wrote on his Facebook page. Italy's cost of borrowing shot straight back up, spending the rest of the afternoon chopping up and down and ending the day with yields back nearly at their peak levels.
The drama has, of course, just begun. On Tuesday, Berlusconi faces a confidence vote over a routine budget measure one of the more than 50 he has faced since he took power in 2008. Though few doubt his survival on that vote, he has said he plans to call yet another one, this time over the controversial reform measures demanded by the European Union. "I want to look into the faces of those who try to betray me," he told a friendly Italian newspaper. Meanwhile, the Prime Minister's support continues to plunge, and the opposition is considering demanding its own vote, of no confidence, in another effort to bring the government down. Whatever happens in the upcoming days, only one thing is certain: it won't be as simple to summarize.