Shares up on hopes Italy will rein in debts

[November 08, 2011]  PARIS (AP) -- Stock markets advanced Tuesday in the run-up to an Italian parliamentary vote that could well determine whether Silvio Berlusconi remains the country's premier.

Underlying sentiment in the markets remains jittery and could easily swing back and forth on the back of how Berlusconi's government looks like it will perform at the budget vote later.

Berlusconi's government is under intense pressure to enact quick reforms to shore up Italy's defenses against Europe's raging debt crisis. However, a weak coalition and doubts over Berlusconi's ability to push through austerity and reforms have heightened the unease in financial markets that Italy could need financial aid.

In a reflection of the uncertainty surrounding Italy's future, 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 how much confidence investors have 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 rollover its debts.

That's an outcome everyone wants to avoid since Italy -- with euro1.9 trillion ($2.6 trillion) in debt and the eurozone's third-largest economy -- is generally considered too big to bail out.

By late-morning Tuesday, the yield, or interest rate, on Italy's ten-year bonds was at 6.60 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 -- whose credibility on delivering reforms is wafer-thin -- would lose a parliamentary vote scheduled for later Tuesday. 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.

In Europe, France's CAC-40 rose 1.6 percent to 3,153, while Germany's DAX climbed 1.7 percent to 6,029. The FTSE index of leading British shares rose 1 percent to 5,568.

Wall Street was also poised to open slightly higher. Dow futures were up 0.3 percent at 12,046, while the broader Standard & Poor's futures rose 0.2 percent to 1,260.

The euro was also up modestly, gaining 0.2 percent to $1.3781.

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 73 cents to $96.28 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.

[Associated Press; By SARAH DiLORENZO]

AP Business Writer Pamela Sampson in Bangkok and researcher Fu Ting in Shanghai contributed to this report.

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