Berlusconi Reins in Allies as Italian Tax Deal Deadline Looms

Former Italian Prime Minister Silvio Berlusconi imposed a media moratorium on his fractious allies as the country’s leaders seek to tamp down divisions before a key tax-policy deadline.

Berlusconi, 76, instructed his collaborators yesterday to avoid public comments after reports that disagreements within his People of Liberty party threatened to upend talks with Prime Minister Enrico Letta on changes to a controversial property tax. The fiscal debate, on the agenda of a cabinet meeting tomorrow, is shaping up as a prelude to the fight over Berlusconi’s political fate.

The friction within Letta’s four-month-old coalition has exposed the country to turmoil in bond and equity markets. Investors are concerned that even if Letta forges a tax compromise, he will struggle to keep his government together when the push to expel Berlusconi from parliament comes to a head next month. An impeachment process for Berlusconi, convicted of tax fraud by Italy’s top court, starts on Sept. 9.

“The real risk for government stability comes from the justice side,” said Federico Santi, an analyst with Eurasia Group. “If anything, the economic policy side has become entangled with discussions over justice.”

The benchmark FTSE MIB Index (FTSEMIB) fell 1.7 percent to 16,692.58 at 11:36 a.m. in Milan after sliding 2.1 percent yesterday. The difference between yields on Italy’s 10-year debt and similar-maturity German bunds widened 5 basis points from yesterday’s close to 253.1 basis points.

‘Continuing Manipulation’

Berlusconi silenced his allies with an e-mailed statement yesterday that accused the media of “continuing manipulation” to foment dissent within People of Liberty, or PDL. That followed an Aug. 25 interview in the la Repubblica newspaper, which cited Daniela Santanche, a PDL lawmaker, as saying that Berlusconi was determined to bring down the government.

The process to strip Berlusconi of his Senate seat begins with a committee meeting in the upper house and may take weeks or months before an eventual vote in the full chamber is called. Letta’s Democratic Party, the biggest force in the ruling coalition, has said Berlusconi’s expulsion is required by an anti-corruption law passed in December 2012. The PDL, the second-biggest party, has disputed that reading.

Berlusconi, a billionaire three-time premier, lost his final appeal of the tax-fraud conviction on Aug. 1. He is unlikely to serve jail time and has denied wrongdoing.

Letta, 47, and Berlusconi have some common ground in the debate on the property tax, which was imposed last year as an emergency austerity measure. Both the Democratic Party and the PDL have called for cuts to the levy. The Democratic Party wants to ease the burden on less wealthy homeowners, while Berlusconi has pushed for a full repeal on primary residences.

“There’s still some work to do” on the tax before Wednesday, “but we can make it,” Deputy Prime Minister Angelino Alfano, who is also secretary of the PDL, said in a Twitter post late yesterday.

Italian homeowners will be faced with a tax-bill of about 2.4 billion euros ($3.2 billion) if the government can’t reach a deal by Aug. 31.

To contact the reporters on this story: Andrew Frye in Rome at afrye@bloomberg.net; Chiara Vasarri in Rome at cvasarri@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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