Italy’s borrowing costs hit record highs yesterday, as uncertainty about the stability of Silvio Berlusconi’s creaking coalition fed market panic.

The yield on Italian 10-year bonds has shot up from 6.37% to a euro high of 6.64% and it was likely to continue rising throughout the day and today as Berlusconi’s government faces a vote on finances and austerity measures.

The fears of contagion caused European shares to drop in morning trading, with London, Paris and Frankfurt all down by more than 1%.

But just as Greek PM George Papandreou has agreed to step down in Greece, Berlusconi has dug himself in further, entrenching himself and pandering to the other side of the House, which is not in his coalition.

Berlusconi has amazed us with his ability to survive time and time again. The man is seemingly covered in Teflon as sex, sleaze and corruption claims just do not ever seem to stick, despite overwhelming evidence against him.

At least, it is not all doom and gloom. George Papandreou has sealed a deal with the Greek Opposition to form another coalition government which would approve the €100bn EU-IMF bailout package which is needed to save Greece from default.

But, Italy is a different animal. Greece contributes around 2% to the EU’s Gross Domestic Product, while Italy’s is the third largest economy in the eurozone. Yet the fears are not so much about the state of the economy, but rather, Berlusconi’s ability to lead a government, and keep the country stable. These thoughts have been echoed by various international experts who believe that Berlusconi is focusing on his own political survival, rather than the need to steady his ship, for the sake of the eurozone and the EU as a whole.

It is clear that there needs to be concrete action once and for all. Italy’s public debt now stands at 120% of GDP, twice the amount specified by the eurozone for sustainable growth and the country needs to borrow a staggering €300bn just to get through next year alone. The EU and the IMF have agreed to bolster the emergency bailout fund, hitting the €1tn cap, but, is it enough? Can that cover Italy, while at the same time continuing to dig Greece out of the mire, every time its repayments are due? Is it enough to continue to cover Ireland and Portugal? And there is yet another question… what about Spain? The problem is that if Berlusconi does go, Italy could be at the mercy of its whimsical far-right and left-wing parties, none of which really have a clue, beyond the usual rhetoric.

In short, Italy could face a power ‘vacuum’ if Berlusconi does go and that would leave the country in a worse state than it already is. Let’s see if Houdini can do it again today.