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Berlusconi Struggles to Hold on to Power Before Key Italian Budget Votes

Prime Minister Silvio Berlusconi struggled to hold on to power and prove he can implement austerity measures pledged to European Union allies as reports of his imminent resignation sent Italian stocks surging.

Berlusconi denied a report by Giuliano Ferrara, his former spokesman and now editor of newspaper Il Foglio, who wrote today that the premier would step down “within hours.” Berlusconi will likely resign next week in return for support in a vote on the austerity and economic-growth measures, Ferrara said in a phone interview after his initial report.

Reports of his resignation were “totally unfounded,” Berlusconi said in an interview with newspaper Libero today. He said he would call on a confidence vote next week on the austerity measures and “look into the eyes of those who try to betray me.”

Italian stocks reversed early losses after Ferrara’s initial report on the resignation and bonds pared some of their drops. The FTSE MIB index (FTSEMIB) rose 2.4 percent at 4 p.m. in Milan, the biggest advance among Europe’s benchmark indexes, erasing a 2.7 percent decline. Italy’s 10-year bond yielded 6.45 percent, down from a euro-era record 6.68 percent.

Defections Mount

Berlusconi is struggling to keep his allies in line after key lawmakers announced defections before key parliamentary votes in coming days. The premier plans to stake the survival of his government in a confidence vote next week on implementation of measures pledged to the EU that aim to boost growth and trim the region’s second-largest debt. The first test comes tomorrow on a normally routine vote to rubber-stamp last year’s budget report that may indicate whether Berlusconi still has a majority in the 630-seat Chamber of Deputies.

A third member of Berlusconi’s party defected to the opposition last night, after two quit the party last week. Six others called for Berlusconi to resign and seek a broader coalition in a letter to newspaper Corriere della Sera last week. More than a dozen more are ready to ditch the coalition, Repubblica daily reported yesterday, without citing anyone.

“I fear we no longer have a majority in parliament,” Interior Minister Roberto Maroni said on a talk show yesterday. Maroni, a member of the Northern League party that underpins the ruling coalition, said he backs early elections.

Tomorrow’s Vote

The desertions may deprive Berlusconi of the support needed in the lower house for tomorrow’s vote on the 2010 budget report. The Chamber of Deputies failed to back the measure in an initial ballot last month, prompting Berlusconi to call a confidence motion, which he won with a thin 316-vote majority.

“Berlusconi may still be in office, but he has not been in power for some time,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said in an e-mailed response to questions. “He no longer administers.”

Berlusconi, 75, faces mounting pressure at home and abroad to show he can jump start an economy that has expanded less than the European average for more than a decade and cut a debt that tops that of Greece, Spain, Portugal and Ireland combined. The country faces an average of almost 20 billion euros ($27.5 billion) of bond maturities a month next year at a time when it must pay 470 basis points more than Germany to borrow for 10 years.

No Confidence

The yield on the benchmark bond is now close to the 7 percent level that drove Greece, Ireland and Portugal to seek bailouts. In a bid to boost confidence, Berlusconi on Nov. 4 asked the International Monetary Fund to monitor Italy’s debt- cutting efforts.

“A lot of people, as yields have gone higher in Italy, actually see value in Italian bonds,” Erik Nielsen, chief global economist at UniCredit SpA in London, said in an interview with Francine Lacqua on Bloomberg Television’s “On the Move.” “However, very few people can live with the volatility. We don’t know whether Italian bonds are going to go to 7 or 7.5 percent or what have you, so the volatility at this time of the year is just too much for investors.”

In Italy, governments routinely call confidence votes to bring rebellious lawmakers into line and speed the passage of legislation. Berlusconi has used the mechanism more than 50 times since his election in 2008.

With the ranks of Berlusconi’s majority thinning, opposition leaders are also trying to muster backing for a no- confidence vote to try to topple the leader, who has governed for more than half of the 17 years since he entered politics in 1994. Berlusconi has faced only one such vote, which he survived, in December of last year.

Forming Government

Should he fail to muster a majority in either type of confidence vote, the government would fall and President Giorgio Napolitano would then consult with political parties to see whether another majority could be formed. Napolitano could also try to build support for a so-called technical government led by a prominent figure charged with implementing the economic reforms and eventually preparing the country for new elections. If Napolitano cannot forge a new government, elections would be called and likely held two months after the consultations end.

Should Berlusconi win the confidence vote next week, he would likely resign and push Napolitano to agree to elections in January, rather than negotiating a new government, said Ferrara, who ruled a technical administration. Il Foglio’s biggest shareholder is Paolo Berlusconi, the premier’s brother.

Popularity Slumps

Berlusconi’s popularity is at a record low and his coalition trailed the main opposition alliance by 10 percentage points in a Nov. 1 poll by IPR Marketing conducted on Oct. 28. No margin of error was given.

Napolitano, 82, who consulted last week with all political parties about the crisis, called for unity at the weekend. Italy can’t mend itself “in a climate of war” and it’s “indispensible” that all parties back the austerity and growth measures promised to the European Union, Napolitano said.

Berlusconi’s government in August approved 45.5 billion euros in austerity moves, its second deficit-cutting plan in a month, to secure European Central Bank purchases of Italian debt after yields surged above 6 percent. The central bank is free to stop the buying if Italy fails to pass its reforms, ECB Governing Council member Yves Mersch told la Stampa daily in an interview.

Italy, which is due to auction treasury bills this week, sells more than 200 billion euros of bonds a year. Its 1.9 trillion-euro debt amounts to 120 percent of gross domestic product, and is second in Europe to that of Greece.

Berlusconi yesterday said he plans to govern until his term ends in 2013 and reiterated that Italy must swiftly approve its economic overhaul.

“Italy’s ability to gain market confidence will be determined by whether it will implement sound structural reforms within a realistic timeline,” Vladimir Pillonca, an economist at Societe Generale SA in London, said by e-mail. “Market confidence is extremely hard to restore once lost” and “until then, Italy will remain Europe’s epicenter of systemic risk.”

To contact the reporters on this story: Marco Bertacche in Milan at mbertacche@bloomberg.net.

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net.

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