ROME — Italy's president moved swiftly Wednesday to reassure anxious markets, promising that Silvio Berlusconi would soon be vacating the premier's office and unexpectedly lavishing praise on economist Mario Monti, who might lead the debt-plagued country's next government.
The former European competition commissioner is widely considered to be a top contender to be the next Italian premier, now that Berlusconi has pledged to resign as soon as urgently demanded economic reforms are approved by Parliament.
President Giorgio Napolitano's office announced he had named Monti, who now runs the prestigious Bocconi University in Milan, as a senator-for-life. Senators-for-life include notable figures outside of politics and have voting privileges in the Senate. The honor could reinforce Monti's widely viewed status as a respectable figure above party politics.
Earlier in the day, financial markets had pounded Italy, as investors worried that Berlusconi might linger in office. Napolitano had responded by declaring there was no doubt that Berlusconi would leave soon, appearing to soothe investors.
State TV on Wednesday night said the financial reform measures so eagerly sought by Italy's eurozone partners might be approved by Saturday.
It was another chaotic day driven by the European debt crisis. The Dow Jones industrial average dropped nearly 240 points in New York morning trading after Italy's borrowing costs soared to a new record high. Traders were troubled by signs that Europe's unending debt crisis was enveloping Italy — the eurozone's third-largest economy, a nation too big for Europe to bail out.
And across the Ionian Sea, Greek lawmakers labored for a third day but finally came up with a deal to create an interim government to pass the country's new debt deal. Outgoing Greek Prime Minister George Papandreou, who was expected to formally resign with hours, wished the next prime minister well but gave no indication of who it would be.
Greek opposition members claimed the ruling Socialists were holding up the naming of the interim Greek leader.
Berlusconi has pledged to resign after the Italian parliament passes the financial reforms that European officials have been demanding for months. The process can take up to two weeks, but Napolitano said that would be accelerated to days, allowing him to quickly begin talks on forming a new government or calling new elections.
"Fears are totally unfounded that Italy may experience a long period of inactivity," Napolitano said, adding that "emergency measures" could be adopted at any time.
Italian Senate President Renato Schifani told reporters he was expecting approval of the economic measures by the end of this week.
"The moment we're going through, with international speculation attacking our country, requires swift choices and political cohesion," Schifani said.
Italy's key borrowing rate spiked to a high of 7.40 percent on Wednesday, up 0.82 percentage points from the previous day, as markets expressed concern about how swift and complete Italy's political transition would be. That's over the level that eventually forced other eurozone countries like Greece and Portugal to seek bailouts.
The rate settled down to 7.26 percent after Napolitano's remarks.
"Berlusconi is the supreme political maneuverer. And no one will believe he has resigned until, yes, he has done so. Simple as that," said Jan Randolph, head of sovereign risk analysis at IHS Global Insight.
No one is suggesting that Italy is headed for an immediate bailout. Randolph said it will take a while for the higher borrowing rate to cause problems for Italy's "mountain of debt."
"With a catastrophic scenario — and it seems we are facing now a catastrophic scenario — maybe Berlusconi can be pushed to support a new government. Or maybe his party will crumble," said Roberto D'Alimonte, a political analyst at Rome's LUISS University.
Noted economist Nouriel Roubini, who has lived in Italy, expressed a similar view on Twitter: "Yields at 7%: markets are telling Berlusconi to leave NOW. They don't buy his scheme of pretending to leave in 2 weeks after budget is passed."
D'Alimonte said investors are hoping for a technocratic government led by Monti.
Berlusconi and his allies claim such a solution would be undemocratic, however, because the conservatives won the last election.
With debts of around €1.9 trillion ($2.6 trillion), Italy is considered too big for Europe to bail out. Higher borrowing rates will make it more difficult and expensive for Italy to roll over its debts. It has over €300 billion ($412 billion) to raise in 2012 alone.
The European Central Bank has been buying up Italian bonds to keep yields at reasonable rates — but Randolph said that is just throwing good money after bad.
"You can bring yields down, but they can't keep them down unless the borrowing government takes concrete steps to improve creditworthiness," Randolph said. "Seven percent is not sustainable over several years."
Italy's economy is hampered by high wage costs, low productivity, fat government payrolls, excessive taxes, choking bureaucracy, and an educational system that produces one of the lowest levels of college graduates among rich countries. The country needs to pass the additional austerity measures and structural reforms pledged by Berlusconi to world leaders last week.
The reform measures include a plan to sell government assets — expected to raise €5 billion ($6.9 billion) a year for three years — and tax breaks to reduce high youth unemployment and to get more women into the work force. 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 workers to match European trends, despite the fierce resistance of his allies in the Northern League.
Markets have been unnerved since some investors in Greece are going to lose 50 percent of their holdings. If a so-called "haircut" can hit Greek investors, some fear those holding Italian bonds could also see losses if Italy doesn't get its act together.
"Markets attack weak animals like lions," said political analyst Franco Pavoncello, president of Rome's John Cabot University. "Italy is perceived as being extremely weak politically, which is too bad because economically it is not too weak."
In the meantime, Berlusconi is not yet out — and there is considerable uncertainty of what kind of government will follow.
While Berlusconi is not running for office again, he plans to remain active as the founder of his political party and would help out in any political campaigns.
The 75-year-old Berlusconi wants new elections soon with his hand-picked successor, former justice minister Angelino Alfano, as a candidate. At 41, Alfano represents a new generation of center-right politicians after 17 years of Berlusconi leadership.
But D'Alimonte said Berlusconi would still be pulling the strings.
"He will push Mr. Alfano as the candidate, but he will direct the orchestra. Alfano will be the first violin," D'Alimonte said.
European officials find themselves in a quandary as they try to come up with an effective backstop for indebted countries. European governments decided last month to increase the effective power of their €440 billion ($600 billion) rescue fund, the European Financial Stability Facility, but it is still considered too small to bail out Italy.
European finance ministers are still working on the complex details of how to increase the fund's effective lending power to over €1 trillion ($1.36 trillion) by having it partially insure government debt or by attracting outside investors. But economists have doubts whether either method will work.
The European Central Bank thus remains the only available outside firewall available against Italy's rising yields. It has been buying government bonds in the secondary market, which drives down borrowing costs for Italy.
But the bank has warned the program is only temporary. New ECB president Mario Draghi — himself an Italian — said last week it was "pointless" for European governments to expect outside help to drive down interest rates and the only solution was for them to reform their own finances. Before his appointment, some had feared that having an Italian at the helm of the ECB would make the bank too lenient on debt-strapped countries.
Analysts have speculated the ECB may be deliberately limiting its bond purchases to keep the pressure on Italy to push ahead with economic reforms
Barry contributed from Milan. David McHugh contributed from Frankfurt. Frances D'Emilio contributed from Rome.