Prime Minister Silvio Berlusconi, facing record bond yields andcalls for his resignation, will seek to reassure the nation asItaly and Spain struggle to avoid becoming the next victims ofEurope's debt crisis.

Berlusconi will give a national televised address in the Chamberof Deputies in Rome at 5:30 p.m. today to lay out his plan to boostgrowth and tame the euro region's second-biggest debt. He'lladdress the Senate at 7:30 p.m. as he tries to shore up confidencein Italy after bond yields soared to euro-era records and thebenchmark stock index slumped to a 27-month low.

European leaders' agreement last month on a second bailout forGreece and Italy's subsequent austerity plan to balance the budgetfailed to convince investors that Berlusconi's government can avoidseeking outside aid. While Spain also faces surging bond yields,confidence in Italy has been shaken by political turmoil, withBerlusconi's grip on power weakened by corruption allegationsagainst him and some of his main allies.

“The serious problem is that politics is once again having animpact on markets,” Franco Pavoncello, a politics professor andpresident of Rome's John Cabot University, said in an interview.“For a long period of time after the start of the euro, it didn'thave much of an impact. Now there is a country risk that requiressatisfactory political stability in the eyes of the markets. Itseems evident for now, Italy isn't giving that impression.”

Bonds Rise
Spanish and Italian 10-yearbonds rose for the first time in six days today after the Swisscentral bank cut interest rates, stoking speculation Europeanpolicy makers may also take action to ease stresses in financialmarkets. The Italian 10- year bond yield fell five basis points to6.07 percent as of 12:36 a.m. in Rome as the extra yield premiuminvestors demand to hold the security instead of German bundsnarrowed 10 basis points to 361 basis points. The spread earlierhad reached 391 basis points, a euro-era record.

Italy's benchmark stock index, the FTSE MIB Index, was up 1.2percent after earlier dropping nearly 2 percent. Intesa SanpaoloSpA, the country's second-largest bank, and Banco Popolare SC bothreturned to Milan trading after being suspended amidvolatility.

Finance Minister Giulio Tremonti met in Luxembourg today withPrime Minister Jean-Claude Juncker, who heads the group ofeuro-region finance ministers. “We had a long discussion visitingall the problems the euro area is facing and we'll continue ourmeditation in common,” Juncker told reporters after the talks,which Tremonti called “long and fruitful.”

Spanish Plans
Berlusconi will make hisaddress after other European governments took steps to showinvestors they'd remain active during the summer holidayseason.

Spanish Prime Minister Jose Luis Rodriguez Zapatero, whoannounced early elections in November after his country's bondyields also jumped to records, delayed his vacation yesterday toremain in “permanent contact” with the European Commission andFinance Minister Elena Salgado. He later said he'd go on holidayand probably return to Madrid and hold “working meetings” to keepup to date with developments.

President Nicolas Sarkozy called an extraordinary session ofparliament for Sept. 6 to vote on France's amended budget planincorporating changes to the euro rescue fund.

EU Summit
Berlusconi has barely spokenpublicly since the selloff of Italy accelerated last month in therun-up to a European Union summit on July 21. That meeting adoptedthe new aid plan for Greece and established a mechanism to aidcountries facing surging borrowing costs such as Italy and Spainbefore they require bailouts. Opposition parties had publiclycalled on Berlusconi to address the nation.

Pier Luigi Bersani, leader of the main opposition DemocraticParty, said Aug. 1 that Berlusconi's appearance was a “small win”and said the real victory would be “for Berlusconi to go to theItalian president and present his resignation.”

Berlusconi's government managed to speed the passage of theausterity plan through parliament on July 15, a month ahead ofschedule, to show investors Italy was serious about bolstering itsfinances. Unlike Greece, Ireland and Portugal, Italy has kept itsdeficit under control and the plan seeks to bring the shortfallwithin the EU's limit of 3 percent of gross domestic product nextyear and balance the budget in 2014.

Growth Lagging
Italy's government is nowpledging to go ahead with plans to boost economic growth, which haslagged behind the euro-region average for more than a decade,complicating efforts to reduce a debt of 120 percent of GDP. That'ssecond only to Greece in the euro region, and at 1.8 trillion euros($2.6 trillion), is more than the total borrowing of Spain, Greece,Ireland and Portugal combined in nominal terms.

After passing the consolidation package, “it's quite difficultto really think that they can do something on the domestic sidethat will change dramatically the environment here for Italiandebt,” said Laurent Fransolet, head of European Fixed IncomeStrategy Research at Barclays Capital in London. “I think there isa bigger element of global and European worries coupled withilliquidity and a complete lack of investor confidence inanything.”

Salgado of Spain called on July 29 for the EU summit decisionsto be “implemented more quickly” to reassure markets. Finnish PrimeMinister Jyrki Katainen told state-owned broadcaster YLE today thatEurope is in a “dangerous” situation and all governments must actto curb debt. Spanish and Italian debt yields are “extremelyworrying and scary,” he said.

Merkel on Vacation
While Italy, Spain andFrance are taking steps to calm investors, Germany remains silent.Chancellor Angela Merkel, who is on a three-week vacation, saidJuly 22 before she left that Europe's politicians must follow a“controlled process of sequential, coordinated steps and measures”in combating the roots of the crisis: indebtedness and a lack ofcompetitiveness. Merkel is currently in the Italian Alps.

Investor concern about Berlusconi's ability to steer Italythrough the crisis has been heightened by the growing divisionswithin his ruling coalition that have been spurred by corruptionallegations against the premier and some top allies. Dozens ofBerlusconi's lawmakers abandoned his coalition last year aftercriminal charges of sexual misconduct against him, thinning hisparliamentary majority.

More recently, Tremonti, considered the enforcer of Italy'sfiscal discipline, has faced calls to resign over a criminal probeagainst a former aide, Marco Milanese, accused of taking kickbacks.Tremonti said July 29 that he had committed errors, but had donenothing illegal.

Ratings Outlook
Standard & Poor's andMoody's Investors Service both cited Italy's political situation asone of the reasons for changing their outlook on the country'scredit ratings to negative.

“The challenge here is that the political system is distractedand not fully focused” on the crisis, Michael Spence, a Nobel Prizelaureate and professor of economics at New York University's SternSchool of Business, said yesterday in an interview with MaryamNemazee on Bloomberg Television.

“There is a risk that the political and the policy-making systemwon't function well enough to get on this problem fast enough andthere will be a loss of confidence in the ability to get thatdone,” he said.

Borrowing Costs
The surge in Italy's bondyield is already increasing its borrowing costs. The Treasurypriced 10-year bonds to yield 5.77 percent at the last auction onJuly 28, the highest in more than 11 years. Italy has no sales ofbenchmark bonds scheduled until Aug. 30. The Treasury has completed64 percent of the 225 billion euros in bond sales due this year andstill needs to auction 81 billion euros more by the end of 2011,UniCredit SpA estimated in a research note.

Lamberto Dini, a former Italian prime minister, blamed U.S.hedge funds that “are using short selling for pure speculation, notprecautionary behavior.” He called for short selling to be“suspended for a while.”

“The moment of truth is coming,” Dini said on BBC Radio 4'sToday program. “When the house is burning the fire needs to be putout, and that is the job of the government.”

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