MILAN – Italy became the latest target in Europe's financial crisis Monday, as soaring borrowing rates intensified pressure on Premier Silvio Berlusconi to resign and let a new government reform the country's spendthrift ways.
Berlusconi batted away reports that he was considering stepping down in favor of early elections, saying they were "without foundation."
But the prospect of financial disaster was real because of Italy's huge debts and slow growth. Unlike Greece, Ireland and Portugal -- the three countries that Europe has already bailed out -- Italy's economy could be too large to rescue.
Investors want the government to quickly pass measures to boost growth and cut debt. But defections from Berlusconi's coalition government mean he no longer commands enough loyalty to pass the reforms.
Increasingly, Berlusconi is himself being seen as the problem.
If Berlusconi should resign or lose a confidence vote, President Giorgio Napolitano would decide whether to call early elections, or name a government of technocrats rather than politicians. The most widely discussed name to lead a technical government is Mario Monti, the former EU competition commissioner who once blocked General Electric's takeover of Honeywell.
The opposition center-left has long demanded the resignation of Berlusconi, citing sex scandals, criminal prosecutions and legislative priorities it says are aimed at protecting his own business interests rather than those of the country. However, it has failed to come up with a leader who can energize the base and create a credible program, leaving the opposition divided and rudderless.
The ultimate fear is that Italy cannot pay for its $2.6 trillion debt and need international help. Europe would struggle with a bailout that large, meaning a default that could break up the 17-nation eurozone and drag down the global economy.
During a G-20 summit last week, Berlusconi had to ask the International Monetary Fund to monitor the country's reform efforts, a humiliating step for the eurozone's third-largest economy.
The yield on Italy's 10-year bonds jumped another 0.42 of a percentage point Monday to 6.67 percent, its highest level since the euro was established in 1999. That is drawing uncomfortably near the 7 percent threshold that forced both Ireland and Portugal to accept bailouts. As yields rise, governments must devote more of the national budget simply to paying interest costs, creating a vicious circle of debt.
The European Central Bank said Monday that it stepped up its program to buy government bonds last week, spending $13 billion. It has been buying bonds for weeks to keep a lid on borrowing costs to help prevent Italy and Spain from succumbing to the debt crisis.
Berlusconi had lunch Monday with his children and friends at his villa near Milan, sparking Italian news media to speculate he was devising an exit strategy. But the lunch is a long family tradition and his Facebook page said "the reports of my resignation are without foundation."
Public administration minister Renato Brunetta, a Berlusconi loyalist, acknowledged Monday that the government has a "numbers problem" in parliament and if a majority is lacking then "everybody goes home." Interior Minister Roberto Maroni agreed, adding "it is useless to persist."
James Walston, professor of political science at the American University of Rome, said Berlusconi's time is quickly running out, even though elections are not due until 2013.
"He could go tomorrow. He could go next week. The sort of pressure that he is under, coming from his own people, will make it sooner than later," he said.
But Berlusconi has remained defiant, insisting he still commands enough support in Parliament.
"I don't understand how rumors of my resignation are circulating," Berlusconi was quoted as saying Monday by Libero newspaper.
Only the loss of a confidence vote can force a government to resign. Opposition leader Pierluigi Bersani said lawmakers are planning exactly that. Political analysts say a vote could come as early as Tuesday, when parliament is expected to approve the state's balance sheets -- a routine measure that failed by one vote last month.
Other analysts say should Berlusconi step down, he would seek to have his right-hand man, Gianni Letta, named to succeed him as premier until early elections can be organized. It is not known whether the Italian president, Napolitano, would agree to that.
If the opposition doesn't call a vote of confidence this week in an effort to unseat him, Berlusconi has pledged to call one himself to prove his majority stands, possibly next week, on reforms and other stopgap measures to lower Italy's debt -- now near 120 percent of GDP -- and revive the dormant economy.
The reform measures include a plan to sell government assets -- expected to raise $6.9 billion a year for three years -- and tax breaks to reduce youth unemployment of 29 percent and to get women back into the work force in a country where just 48 percent of women have jobs. The legislation would also allow stores to stay open on Sundays and open up closed professions.
Berlusconi has also pledged to raise the retirement age to 67 for all to match European trends, despite the fierce resistance of his allies in the Northern League, on whom Berlusconi relies to govern. They have proven at times difficult allies, exerting a strong independent streak and challenging Berlusconi on key policies. The leader, Umberto Bossi, also has on several occasions expressed doubts about Berlusconi's ability to complete the current mandate.
The leader of Italy's largest labor confederation, meanwhile, predicted 2012 will be a "terrifying" year for the economy even if Berlusconi leaves power. CGIL leader Susanna Camusso also slammed Berlusconi's anti-crisis plan as containing virtually nothing to spark economic growth.
"I hope there will be (early elections), and that they will be soon for the good of the country," she told The Associated Press on Monday.
Mario Draghi, an Italian who just took over as European Central Bank president, said last week that since joining the euro, Italy has enjoyed unnaturally low interest rates for years because its monetary policy has been linked to that of stronger economies like Germany.
"For a long time spreads between sovereign bonds in the euro area were very narrow," he said. "They did not reflect the different realities of different countries."