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Eurozone Crisis Deepens Amid Fears Italy May Need A Bailout That Europe Can Not Afford

09/11/2011 19:26 GMT | Updated 09/01/2012 10:12 GMT

The crisis in the eurozone deepened on Wednesday as Italy appeared to be headed towards needing a bailout that the European Union can ill afford, despite the announcement that Silvio Berlusconi would resign as prime minister.

If Italy tried to borrow money today it would have to pay an interest rate of over 7%, the level at which Greece, Portugal and Ireland were forced to seek a bailout.

But while those three countries have relatively small economies, Italy presents a much larger problem for the European Union and there are concerns that it is 'too big to save'.

Italy, the eurozone's third largest economy, has a debt of 1.9 trillion euros and needs a rescue package of 1.4 trillion euros. But the eurozone rescue fund is currently only 440bn euros.

There is a growing consensus amongst analysts that the Italian situation has pushed the world economy into a dangerous place, and confidence is very shaky.

The FTSE 100 and German Dax closed down around 2% and the French CAC40 down 2.25%.

Much of the problem appears to be connected to the market's uncertainty over the political situation in Rome. Berlusconi has insisted he will remain in place until the parliament passes austerity measures designed to get to grips with Italy's debt problem.

The timing is now critical. Italy's finance bill is now expected to be in place within days before markets open on Monday morning, and Berlusconi, if he sticks to his word, will resign immediately afterwards.

If a technocratic government is named, which some believe is likely, then the markets may be satisfied and Italy could avoid insolvency.

On Wednesday evening Italian president Giorgio Napolitano named former EU commissioner Mario Monti a senator for life - perhaps paving the way for him to take charge of a national government following Berlusconi's resignation.

But there not universal support for such a move, with some members of Berlusconi's party favouring a general election.

Robert O'Daly, economist at the Economist Intelligence Unit, said: "That spooks investors, largely because an election would mean a couple of months of campaigning, which would leave Italy rudderless for a couple of months at a time when they need a government to take additional steps."

While the focus has shifted to Italy, chaos still appears to reign in Greece where political parties continue to fight over who should lead a coalition government even though prime minister George Papandreou announced he was standing down.

In a televised address Papandreau said: "I want to wish every success to the new prime minister and the new government. I will stand at their side and will back this national effort to the utmost of my ability."

It is believed that Papandreau had wanted Philippos Petsalnikos, the speaker of the Greek parliament, to take over.

But the opposition New Democracy party balked at that choice given his apparent lack of economic expertise. But opposition leader Antonis Samaras it is up to Papandreau's PASOK party to propose a new prime minister as it holds the most seats.

Greek political leader are due to meet at 10am tomorrow morning to continue talks that could put Lucas Papademos, the former vice president of the European Central Bank, back in the frame for the top job.