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Breaking up is hard to do

The Italian Prime Minister Silvio Berlusconi has announced his resignation, and he will step down as soon as parliament passes urgent budget reforms. He has also confirmed that he will not stand for re-election should early elections be held.

“I will resign as soon as the law is passed, and, since I believe there is no other majority possible, I see elections being held at the beginning of February and I will not be a candidate in them,” he said.

This news was initially welcomed by the financial markets which saw a rally, but Italy is far from out of the woods, and the brief rally has now collapsed. The borrowing costs for Italy have hit a new high, touching 7.28% on 10-year government bonds. Investor worries are that Italy will become the next victim of the debt crisis. As a comparison, Germany’s cost of borrowing is just 1.73% for ten years.

Asian stockmarkets have opened markedly lower this morning with the Nikkei down 2.9%, South Korea’s Kopsi down 3.8% and the Hang Seng dropping 5.3%.

The fear of contagion is fast becoming a reality and the break-up of the eurozone (or, at least, a radical shake-up) seems to be a certainty as opposed to a possibility. Greece is still struggling to name a new Prime Minister and consequently the formation of a new unified government. This is putting more pressure on the eurozone and France and Germany have begun preliminary talks about a possible break-up of the eurozone. Although this is still seen as an unlikely outcome, France and Germany are clearly worried enough to start preparing for it.

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