The long-term cost of borrowing for Italy increased sharply after Moody's slashed the country's debt rating by two notches. In early deals, the Italian benchmark 10-year government bond was at 6.013 percent, back above the key 6 percent and up from 5.897 percent on Thursday.

Moody's warned it could further downgrade Italy's new Baa2 rating, which stands just two notches above junk status, if Milan's access to debt markets dried up.

The timing of the downgrade is particularly bad as it comes just hours before Italy heads to the debt market to raise 5.25 billion euros.

Former Italian Prime Minister Silvio Berlusconi will return to front-line politics as the centre-right candidate in next year's general election, a senior official in his PDL party was quoted as saying on Thursday.

Yes, Berlusconi is the candidate for premier, Fabrizio Cicchito, PDL parliamentary leader told Italian news agencies after a meeting of the party leadership at Berlusconi's Rome residence.

He said the return of Berlusconi, the undisputed master of a party built up entirely around himself, meant there would be no primaries to find a candidate, as had been originally expected.

Prime Minister Mario Monti laid down a challenge to Italy's unions on Tuesday with plans for deeper-than-expected spending cuts and public sector job reductions as part of a spending review that drew threats of strike action.

Monti, his standing strengthened by winning European Union backing for a plan to use EU bailout funds to limit the damaging volatility that has hit Italy's sovereign bonds, has been hammering out the details of the spending review this week.

According to a source present at a meeting between Monti and local government officials, Monti expects savings from the spending review to be much higher than the 4.2-billion euros indicated hitherto. The value of the 2012 cuts could be as high as seven billion euros, sources told Reuters last month.

He also outlined cuts that include overall personnel reductions of 10 percent and a 20 percent cut in the number of state managers, without giving a timeline.

The government is under pressure to find additional savings to avoid the need for a two percentage point hike in value added tax which is otherwise due to come into force in October.

In addition to the savings already set, the government must find extra cash to help pay for the damage caused by two major earthquakes in the Emilia Romagna region in May, which caused an estimated five billion euros worth of damage.

However it has run into opposition from labour unions who are fiercely resisting public sector job cuts.

Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.Read the Terms of Service