Italian Prime Minister Silvio Berlusconi is facing intense pressure to resign as he prepares for a parliamentary vote on a state financing bill, as the country's cost of borrowing soars to unsustainable levels.
In the latest blow to the embattled leader, main coalition ally Umberto Ossi called for Berlusconi to "step aside" on Tuesday and called for a former justice minister to lead the government.
The scandal-hit 75-year-old has been much criticised for his handling of the economy during the recent eurozone crisis, and markets highlighted the depths of his unpopularity on Monday by rising on rumours that he was on the verge of resignation, but dipped back down on his denials.
There has been much speculation that Berlusconi has lost his majority in parliament following a number of defections. Six deputies from his own party published an open letter calling for him to step aside last week, and at least two others have indicated that they will not support his government. In total, those eight would reduce his backers to 314, one short of the 315 he would need for a majority.
If his support has collapsed, the prime minister could be compelled to either resign or to hold a confidence vote. He has previously said that he would choose the latter option before stepping down.
A previous attempt to get the financing bill through parliament last month ended in failure and a confidence vote, which Berlusconi passed. While he may make it through today with a narrow majority, his days are numbered, analysts said.
“The opposition parties are waiting until they are certain that they have an absolute majority before they table another motion of no confidence but the collapse of the government seems unavoidable in the coming weeks or months," Robert O'Daly, an economist at the Economist Intelligence Unit said.
“The president, Giorgio Napolitano, whose prerogative it is to call a general election, is keen to avoid a snap election in the midst of the deepening economic crisis. We therefore expect him to call on another high ranking figure from Mr Berlusconi's coalition or a technocrat, possibly former EU commissioner Mario Monti, to try to form a government with broader parliamentary backing," he said. “The government's mandate would be limited to managing the public finances, starting some of the reforms needed to boost productivity and competitiveness, and introducing new electoral laws”.
The Italian economy is in dire straits. The country's 10-year bond yields hit euro-era record highs of 6.676% on Monday, putting its cost of borrowing into dangerous territory in a country which has a debt stock of 120% of its gross domestic product (GDP).
At Coutts, strategist Norman Villamin said that the country was following a path now well trodden by Greece, Ireland and Portugal, all of which needed bailouts from the EU and International Monetary Fund.
"Looking to the evolution of the crisis within the periphery… the sequence of events that followed a sustained rise in 10-year yields to above 6% has been consistent over the past 18 months," Villamin said.
The first stage after this threshold is a push for more austerity measures with international supervision, which is where Italy currently finds itself, he explained. The G20 effectively put Italy on an IMF watch list over the weekend, monitoring the progress of its austerity measures and offering funds, which the country declined.
In the rest of the periphery, the next stage, Villamin said, was a deterioration of the underlying economy, causing the country to miss targets set in their austerity programmes. In the case of Ireland, Portugal and Greece, this happened within two months of their yields passing 6%, and all three sought bailouts soon afterwards.
"Italy appears to be at risk of a similar outcome," Villamin added.
Although Greece has caused severe shocks to resonate across the continent, the risks to Europe and to the global financial system would be significantly greater should Italy fall deeper into its economic troubles. Italy is the third largest economy in the eurozone and a G8 member.