Stock markets pulled back from gains earlier Tuesday after a vote in the Italian Parliament showed the prime minister has lost 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 defences against Europe's raging debt crisis.
But a routine ballot on budget measures on 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 10 years spiked at one point on Tuesday to 6.74%, Italy’s 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 euro 1.9 trillion ($2.6 trillion) in debt and the eurozone's third-largest economy — is generally considered too big to bail out.