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Investors jittery as Italy's govt hangs in balance

By Sarah Dilorenzo

Associated Press

Published: Tuesday, Nov. 8 2011 10:10 a.m. MST

An investor gestures in front of the stock price board at a private securities company in Shanghai, China, Monday, Nov. 7, 2011. World stocks stalled Monday as investors remain unsure whether Greece will be able to work itself out of a debt crisis despite a weekend deal by the country's leaders aimed at implementing a controversial austerity program. The benchmark Shanghai Composite Index lost 0.73 percent, or 18.5 points, to 2,509.80. (AP Photo)

The Associated Press

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PARIS — Stock markets pulled back from gains earlier Tuesday after a vote in the Italian Parliament showed the prime minister has lost the support of the majority and called into question Rome's ability to rein in its debts.

Investors don't necessarily think it's a bad thing if Prime Minister Silvio Berlusconi is forced to resign — he has waffled on his commitment to spending cuts and other reforms — but the uncertainty is rattling markets.

Berlusconi's government is under intense pressure to enact quick reforms to shore up Italy's defenses against Europe's raging debt crisis. But a routine ballot on budget measures Tuesday turned into a vote of confidence, with more than half the legislators abstaining — a sign they no longer support Berlusconi.

In a reflection of the uncertainty, the interest rates it pays to borrow money for ten years spiked at one point Tuesday to 6.74 percent, its highest level since the creation of the euro in 1999.

Those rates are an indicator of investors' confidence in Rome's ability to pay down its debts, but they also affect that ability: If they rise too high, the country might not be able to make interest payments or roll over its debts.

That's an outcome everyone wants to avoid since Italy — with €1.9 trillion ($2.6 trillion) in debt and the eurozone's third-largest economy — is generally considered too big to bail out.

By Tuesday afternoon, the yield, or interest rate, on Italy's ten-year bonds was at 6.57 percent.

A rate of over 7 percent is considered unsustainable and proved to be the trigger point that forced Greece, Ireland and Portugal into accepting the need for financial bailouts.

Uncertainty also surrounds Greece, which last week flirted with asking voters to approve a rescue package but is now heading for a new national unity government instead. Athens' creditors are demanding that the leaders of the two main parties commit in writing to upholding their end of the deal — or risk jeopardizing the billions of euros in loans that are keeping the country afloat.

For the time being, however, investors seemed to be hoping that Italy would commit to budget cuts that would push down its borrowing costs.

Markets were buoyed Monday by rumors that Prime Minister Silvio Berlusconi would lose a parliamentary vote. The hope in the markets is that a new Italian government would be more serious about getting the public finances into shape and delivering on the reform program.

"Markets might be higher, but the stresses are still showing in the currency and bond markets, with the euro struggling to make headway and Italian benchmark yields still in dangerous territory," said Chris Beauchamp, an analyst with IG Index.

"We had one 'Berlusconi bounce' yesterday on rumors of his departure, so an actual change of government could prompt another surge on markets," Beauchamp added.

The vote showed Berlusconi no longer commands a majority, but it was far from clear if he would leave.

That caused European markets to lose some of their early gains. France's CAC-40 rose 1.3 percent to 3,143.30, while Germany's DAX climbed 0.6 percent to 5,961.44. The FTSE index of leading British shares rose 1.0 percent to 5,567.34.

Wall Street was also responding tepidly. The Dow was down 0.4 percent at 12,020.86, while the broader Standard & Poor's futures slipped 0.2 percent to 1,258.40.

The euro was also up modestly, gaining 0.1 percent to $1.3789.

Concerns about the eurozone debt crisis have weighed on the global economy and any sign that Europe is moving toward resolution has generally been taken as a good sign for growth and thus demand for energy.

Benchmark crude for December delivery rose 51 cents to $96.03 in electronic trading on the New York Mercantile Exchange.

Earlier, though, Asian markets were beset by uncertainty. Japan's Nikkei 225 index fell 1.3 percent to close at 8,655.51. South Korea's Kospi swung into negative territory midday, to close 0.8 percent down at 1,903.14.

Hong Kong's Hang Seng was nearly unchanged, closing less than 1 point higher at 19,678.47. Mainland Chinese shares slipped, with the benchmark Shanghai Composite Index edging down 0.2 percent to 2,503.84 while the smaller Shenzhen Composite Index dropped 1 percent to 1,054.73.

Pamela Sampson in Bangkok and Fu Ting in Shanghai contributed to this report.

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