Investors bet Italy will avert crisis

Former Prime Minister Silvio Berlusconi triggered the latest round of political uncertainty in Italy by withdrawing his support for the coalition government over the weekend.

LONDON (CNNMoney) Italian markets were firmer Wednesday as the country's parliament looked set to reject an attempt by Silvio Berlusconi to collapse the coalition government.

Stocks and bonds gained ground as investors bet that center-left Prime Minister Enrico Letta would win a crucial vote of confidence, drawing support from dissenters within Berlusconi's own party.

"A government and political crisis would only mean more economic difficulties, it means not going through with the reforms needed to boost the economy and help the unemployed and the country," Letta told parliament.

Italy's main stock index gained as much as 1%, as most other European markets weakened, and yields on its 10-year government bond dropped to 4.35%, narrowing the premium the country has to pay to borrow.

Markets were jolted Monday after Berlusconi withdrew his support for Letta's coalition after just five months and ordered his party's ministers to quit the government, raising the risk of early elections and months of uncertainty in the eurozone's third-biggest economy.

Since then, local media reported that several members of Berlusconi's party are prepared to support Letta, and Italian markets rebounded strongly late Tuesday.

Early elections would make it hard to get agreement on a budget for 2014 and delay reforms needed to keep Italy on track to meet EU-mandated borrowing targets.

"A Letta victory would be a confidence boost for Italy and the eurozone, as the market reaction yesterday showed," said Christian Schulz, senior economist at Berenberg. "Beyond the mere confidence boost, Letta's coalition government could become! more stable if freed from Berlusconi's influence."

Italy has made substantial progress in cutting its budget deficit since it teetered on the brink of collapse at the height of the eurozone debt crisis in 2011, when yields on its debt topped 7%.

And the economy is showing signs of stabilizing after nearly two years of recession and a decade of stagnation. Tough austerity measures have helped produce a primary budget surplus and a program of structural reforms is beginning to bear fruit.

But the pace of reform has slowed in recent months and growth next year will be only a sluggish 0.7%. The country's €2 trillion debt mountain -- already above 130% of GDP -- will rise further in 2014, according to International Monetary Fund forecasts.