What now?

Well at least Silvio Berlusconi can tell his grandchildren that Italy’s borrowing costs actually rose when he announced his promised resignation. 'They suddenly realised they couldn't do without me' he will say.

The reason the markets weren't happy is that what happens now is anyone's guess. First, let's deal with the 7%, which is the maximum rate a country is supposed to be able to pay before it goes under. Why? What did we all do when base interest rates were 7% or more and countries had to pay a premium over that?

The answer is that in those days countries couldn't borrow as much. When these countries joined the euro and got to pay German interest rates it was assumed they would simply be wealthier on a net basis: that they would allow that extra wealth to trickle down to their citizens, letting them reduce taxes on wealth creation, creating a virtuous circle. Instead they chose to borrow more.

So the 'tipping point' is not an interest rate per se, it is what percentage of a country's income (GDP) goes on paying the banks. Some economists say that a figure of 20% is possible. So if a country borrows 100% of its GDP, it could pay an interest rate of 20% if it didn't have to repay anything. But of course each debt has a maturity and must at least be repaid and rolled over. Italy's average maturity isn't too bad at around 7 years (although Britain's is around twice that) so on its €1.9 trillion of debt, each year it has to come up with one seventh in repayments and 7% in interest, which comes to around 25% of GDP (the debt is 120% of  GDP).

The markets know Italy can pay the 7% for some time, but if it doesn't come up with that extra one seventh, it means default, and default on one debt is default on them all.

So can Italy live with having to come up with a quarter of its income on debt servicing? When I got my first job I spent half my income on rent. Everything is possible if you can cut expenditure to meet the available money. The problem in Italy is that there really isn't the will to cut. The middle classes have their vested interests, the poor think they have suffered enough already, and the rich think that only little people pay taxes. It is the job of a statesman to explain to the people how bad things really are, and to gain their confidence that, however bad the medicine may taste, it will make them better in the end. It is here that Berlusconi is culpable, more than the Bunga Bunga parties, more than the jokes, more than changing the law to keep himself out or prison. If he had explained eight years ago, when he came back to power, what needed to be done they would have trusted him to do it. But the showman didn't want to upset anyone.

One note of caution about the resignation, which will come into effect when Parliament has passed the budget. Does the draft legislation only cover the promises to Brussels? or are there any Berlusconi-isms, such as 'It will henceforth be illegal to say anything horrid, in court or out of it, about septuagenarian former Prime Ministers.' Perhaps I am being unfair and he will go quietly at the end of the week.

That, however, will not be the end of Italy's problems. It may be just the start of them.