Italy slides deeper in trouble; Swiss franc falls

The euro was down yesterday with markets eyeing a crunch vote on Italy's public finances on concerns over the euro zone debt crisis could engulf the country even as the Swiss franc was pressured by speculation of further policy action to curb its strength.

The Swiss franc dropped sharply against the euro and the dollar and Swiss National Bank chairman Phillip Hildebrand suggested that the Swiss franc was still overvalued against the single currency.

According to analysts, the Swiss franc's recent gains had been fueled by euro zone developments and this would be taken into account by Swiss policymakers while taking a decision on whether to raise the floor.

Also, with data pointing to deflation in October, the SNB had enough headway to introduce additional measures to weaken the Swiss franc.

Meanwhile, investors continued to be pessimistic about the euro zone, as markets shifted their focus from Greece's frenzied attempts to get its bailout programme back on track to Italy where Prime Minister Silvio Berlusconi is fighting for political survival.

Italy's borrowing rose to a new euro high today as talk of early elections grew, with pressure mounting on premier Silvio Berlusconi to resign to make way for a new government that could pass the economic reforms that Italy needed to avoid a financial disaster.

The premier, however, denied reports of any plans to step down, saying they were "without foundation."

The past few weeks have seen Italy emerge as the new focus of the eurozone debt crisis, given its huge debt and, slow growth, and an economy too large to be bailed out.

Investors would like the government to quickly pass measures to spur growth and reduce debt, but that does not seem possible with Berlusconi at the helm, as his majority in parliament is growing weaker by the day.

Berlusconi himself is widely seen to be central to the problem given that he no longer commands enough loyalty to ensure the quick reforms that are needed, according to European and international financial officials. They say reforms were absolutely necessary if Rome wants to avoid a dramatic debt crisis like the one that has brought Greece to its knees.

The ultimate fear is Italy, the third-largest economy in the euro zone, would need to seek an international bailout to tackle its colossal €1.9 trillion debt.

That would be far beyond Europe's capacity to handle, and could trigger a default and a break up the 17-nation euro zone and drag down the global economy.

Meanwhile, on the bond markets, the yield on Italy's 10-year bonds rose 0.33 percentage points today to 6.58 per cent, its highest level since the euro was established in 1999.

Analysts say that was uncomfortably close to the 7 per cent threshold, that that forced Ireland as also Portugal to go for bailouts.