Italy's borrowing rates spiked Tuesday to their highest level since the euro was established in 1999 ahead of a budget vote in Parliament that could ratchet up the pressure on Premier Silvio Berlusconi to resign.
The markets have turned their attention this week from the political crisis in Greece — where the two main parties were locked in talks Tuesday to forge a national unity government — to Rome.
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.
What happens in Italy is a particular worry as it's the eurozone's third-largest economy. With debts of around €1.9 trillion ($2.6 trillion), Italy's debts are considered by many in the markets as being too big for Europe to bail out.
Higher rates would make it more difficult for Italy to rollover its debts and will mean they consume more and more of national income. Italy has over €300 billion ($412 billion) to raise in 2012 alone.
By late-morning, the yield on Italy's ten-year bonds was up 0.07 percentage point at 6.60 per cent, down from an earlier high of 6.74 per cent. A rate of over 7 per cent is considered unsustainable and proved to be the trigger point that forced Greece, Ireland and Portugal into accepting the need for financial bailouts.
The vote later looks like it's on a knife-edge, with Berlusconi's coalition showing signs of fracture. Italian news agency ANSA reported that Finance Minister Giulio Tremonti hurriedly departed from a meeting of eurozone finance ministers in Brussels to return to Rome.
The Chamber of Deputies vote, on a routine measure, is not a confidence vote —whose loss would require Berlusconi to resign. But a loss would certainly send a political message that Berlusconi is in trouble.