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Italy's borrowing costs jumped to record levels on Friday, underlining its vulnerability at the heart of the euro zone debt crisis and skepticism about whether the struggling government of Prime Minister Silvio Berlusconi can deliver vital reforms.
The 6.06-percent yield paid at an auction of 10-year bonds was the highest since the launch of the euro and not far from the level reached just before the European Central Bank intervened in August to cap Rome's borrowing costs by buying Italian paper.
Italy, the euro zone's third largest economy, is once more at the centre of the debt crisis, with fears growing that its borrowing costs could rise to levels that overwhelm the capacity of the bloc to provide support amid chronic political instability in Rome.
Berlusconi, tainted by scandal and repeatedly at odds with his coalition allies, has promised European partners a package of measures to spur Italy's stagnant economy and cut its towering public debt, but he has failed to convince markets made skeptical by his repeated failure to deliver reforms.
European leaders welcomed a letter of intent on planned reforms delivered by Berlusconi to meet a deadline at a summit this week but emphasized that the measures must now be implemented.
"The interest rates that they are paying are punitive," said Monument Securities strategist Marc Oswald. "As far as Italy goes, it is still the bete-noire of the whole euro zone problem."
"They are still going to carry on having to pay higher yields unless they come up with reform plans and implement them. But anyone who expresses an optimistic opinion about that is probably looking through rose-tainted glasses," he added.
France and Germany have expressed open exasperation at a succession of unfulfilled reform promises by Berlusconi and fear the crisis in Italy could spark a wider emergency that would threaten the very existence of the single currency.
Even if a weakened government manages to pass the difficult reforms Berlusconi has promised, most would not come into force until the middle of next year. Markets are unlikely to remain patient during such a long delay.
Speaking after Wednesday's European summit, French President Nicolas Sarkozy highlighted fears that the crisis could jump from Greece to the much bigger Italian economy.
"If we had allowed Greece to fall, and the speculation shifted on to attack Italy, the markets would then have said we will allow Italy fall too, and that would be the end of the euro," he said in a television interview.
As Italy sinks deeper into the debt crisis, tensions in Berlusconi's government have grown sharply, leading to widespread speculation in the press and even among members of his own party that the government will fall soon, leading to elections in 2012, a year ahead of schedule.
Berlusconi, whose approval ratings have been torpedoed by a mix of scandal and mounting economic and political problems, rejected speculation that he could be forced to go to early elections. He promised to press on with the promised reforms.
Berlusconi said his alliance remained solid with the pro-devolution Northern League party, whose leader Umberto Bossi has expressed open skepticism about the survival of the coalition.
"There is an absolute need for political stability and Bossi thinks exactly the same way I do. The pact we have with the League has never been up for discussion," Berlusconi said.
"No credible political alternative exists."
This week the League rejected plans to hike the pension age to 67, leading to tense late-night negotiations before a compromise was patched up in time to take to a summit in Brussels last Wednesday.
Berlusconi said the package of measures presented in Brussels was welcomed by EU partners.
But the proposals, including an increase in the pension age, rules making it easier to lay off staff and provisions to place civil servants in special redundancy schemes, have raised fierce opposition from unions and skepticism about whether they will ever be implemented.
In the increasingly murky environment of Italian politics, there has been speculation that the package is part of a deal between Berlusconi and Bossi to take the government to the end of the year before triggering new elections in the spring.
On Friday, Berlusconi dismissed any suggestion of a pact to go to the polls before the scheduled date in 2013 and said an election campaign in the middle of the crisis would be "very seriously damaging to Italy."