Italian bonds shatter 7% bail-out ceiling

The cost of government short-term borrowing for the country exceeds even these levels, with one-year bonds having soared to above eight percent.

The development has EU leaders scrambling to respond to the deterioration of the situation in the markets regarding Italy, as the eurozone's rescue fund is far too small to be able to bail out Italy, Europe's fourth largest economy. Rome owes creditors some €1.9 trillion and needs to roll over debts amounting to more than €300 billion in 2012.

Markets have pummelled Italy in recent days, but even an announcement by Prime Minister Silvio Berlusconi signalling that he will resign has not been sufficient to put an end to the turbulence.

On Tuesday evening, Berlusconi announced he would step down after he failed to win an absolute majority in the Chamber of Deputies earlier in the day.

On Wednesday, the Italian leader, who has been chased by sex scandals and corruption charges throughout his tenure, said that Angelino Alfano, the secretary of his political party, the People of Freedom, is his chosen successor.

Alfano, who served as justice minister from 2008-2010, pushed through a law that delivered immunity from prosecution to the prime minister and three other high-ranking offices. Widely seen as an attempt to save the prime minister from trial, the law was declared unconstitutional by the country’s top court in 2009.

Meanwhile, the Italian president, Giorgio Napolitano, declared that the austerity measures and structural adjustment demanded by core EU powers are to be approved within days.

Napolitano is now in discussions with various political parties aiming to find a solution to the political crisis. Early elections, a new centre-right government involving a shuffling of the current conservative coalition, or a national unity government bringing on board the centre-left opposition are the three options on the table.

"Within a short time, either a new government will be formed which can take any further decisions needed with the support of parliament or parliament will be dissolved and an election campaign will begin within the tightest time-frame," he said.

The European Commission for its part would not be drawn on commenting on the situation, with spokeswoman Pia Ahrenkilde telling reporters on Wednesday: “I have no comment on what is still an internally evolving situation in Italy.”

The EU executive’s economy spokesman, Amadeu Altafaj-Tardio told EUobserver however that core EU powers are not pressing the Italian political class to form a national unity government as it did in Greece. Under heavy pressure from the commission, the ECB, the IMF, Paris and Berlin, the centre-left administration of George Papandreou was decapitated over the weekend.

However, in September, following a downgrade in the country's credit rating by Standard & Poor's. "There is a clear need to build national consensus at the political level but also between social partners [EU jargon for trade unions and employers] to adopt and implement an agenda of growth as a matter of urgency," he said at the time.

A team of commission inspectors however arrived in Italy on Wednesday to monitor the implementation of the government’s new austerity measures and structural adjustment.