Italy Halts Budget Decisions as Letta Seeks to Gauge Support

Italian Prime Minister Enrico Letta’s Cabinet delayed approval of key economic measures as political tensions in the coalition led the premier to seek to verify parliamentary support for his government.

“I am not available to continue without clarity” Letta’s office said in an e-mailed statement late yesterday.

Letta’s administration suspended all key economic decisions pending a clear backing from the parties in the governing coalition, the premier’s office said. “There’s no guarantee of government and parliamentary continuity,” according to the statement.

Strains between former Premier Berlusconi’s People of Liberty party and Letta’s Democratic Party intensified this week as Berlusconi’s lawmakers threatened to resign en masse in the event that a Senate committee votes to expel him. Letta’s party says the expulsion of Berlusconi, who was convicted of tax fraud last month, is required under a law passed last year.

Ministers failed to pass a decree including a measure that would have postponed a value-added tax increase scheduled for Oct. 1 to Jan. 1, according to a draft of the proposal obtained by Bloomberg News. A delay of the VAT increase was one of the key planks in Silvio Berlusconi’s electoral campaign, along with the cancellation of a property tax on first homes announced last month.

Confidence Vote

A confidence vote in Parliament won’t be held before Oct. 1, Minister for Parliamentary Relations Dario Franceschini was cited by Ansa as saying at an event near Florence today. In that case, there won’t be enough time to avoid the VAT increase, Deputy Finance Minister Stefano Fassina said in a telephone interview. “The VAT increase is inevitable and the PD and Berlusconi are to blame,” he said.

The euro region’s third-largest economy has been a key concern for investors worried about the future of the euro. While European Central Bank President Mario Draghi’s pledge last year to do “whatever it takes” to shore up the currency has kept a lid on Italian bond yields, a political crisis has the potential to cause new turmoil across the region’s bond market.

Italy’s 10-year yield climbed 13 basis points, or 0.13 percentage point, this week to 4.42 percent at 5 p.m. London time yesterday, the biggest increase since the period ended Aug. 23.

Tensions between the coalition partners “represent a key risk to the economic outlook,” the International Monetary Fund said in a report before the Cabinet meeting yesterday. “Loss of market confidence could be significant and push Italy into a self-reinforcing bad equilibrium and protracted period of slow growth.”

No Alternatives

Berlusconi’s party has yet to decide whether it will express its support to Letta’s government, Il Messaggero reported today, citing Renato Schifani, PD chief whip in the Senate. Without the backing of his allies early elections would be the only option, as alternative majorities don’t seem to be an option, Messaggero reported, citing Schifani.

“Based on rational analysis, the collapse of Letta’s government is not convenient for Berlusconi,” Roberto D’Alimonte, a political science professor at Rome’s Luiss University, said by phone. “Berlusconi is just trying to take advantage of the situation by putting pressure on Letta and Italian President Napolitano to keep alive the attention on his case, also in the eyes of his electors, and to obtain more favorable conditions” for his penalty, he said.

Berlusconi, who turns 77 tomorrow, is unlikely to spend a day in jail for the tax-fraud verdict. His four-year prison sentence will probably be reduced to one year of house arrest or community service, due in part to leniency guidelines. The three-time premier is appealing separate criminal convictions for illegal use of wiretaps, abuse of office and paying a minor for sex. He has denied all charges, saying the trials amount to political persecution.

In an e-mailed statement today, Napolitano denied press reports Berlusconi didn’t respond to his phone calls. In a separate speech at an event near Naples today, the Italian President, who met Letta before yesterday’s cabinet meeting, stressed the need for stability, saying Italy doesn’t need a “permanent election campaign.”

Before it's here, it's on the Bloomberg Terminal.