Italy’s Coalition Teeters as Berlusconi Allies Walk Out

Italian Prime Minister Enrico Letta’s government teetered on the verge of collapse after allies of former leader Silvio Berlusconi, led by Deputy Premier Angelino Alfano, said they planned to quit the cabinet.

The nation’s leaders stopped short of dissolving the five-month-old administration, invoking procedure and scheduling a meeting between Letta and President Giorgio Napolitano today for about 6 p.m. in Rome.

Berlusconi, 77, said he will push for snap elections, while Letta plans a confidence vote in parliament on Oct. 1 or 2 to seek a new majority. Napolitano, 88, said dissolving parliament would be a last resort, Ansa reported.

Letta’s government has been torn apart by legal troubles facing Berlusconi, whose criminal tax-fraud conviction subjects him to expulsion proceedings in parliament. Letta needs 24 votes in the Senate to secure a new majority without Berlusconi, Corriere Della Sera reported. To do so, the premier must win over opposition lawmakers or convince members of Berlusconi’s People of Liberty party to abandon their leader.

“Everything suggests that the coalition is compromised,” Federico Santi, an analyst with Eurasia Group, said in an e-mail. “The most likely outcome is early elections, but the timing would be uncertain.”

Snap Elections

Snap elections would have to be called by Napolitano, who was cited today by Ansa as saying in Naples he would first seek a solution that allows the legislature to continue. Parliament was split into four main blocs by inconclusive elections in February and was reduced to nearly two months of gridlock until Letta and Berlusconi set aside their rivalries to form their makeshift alliance.

Letta is scheduled to speak at a charity event in Rome today at about 5 p.m. and may appear on a news program on state-broadcaster RAI after his meeting with Napolitano, a government spokeswoman said.

Political turmoil has plagued Italy, the world’s third-biggest debtor after the U.S. and Japan, throughout the euro financial crisis. Markets have calmed since European Central Bank President Mario Draghi’s July 2012 promise to protect the single currency.

Berlusconi, forced out as prime minister in 2011, brought down his successor, Mario Monti, in December 2012. The fragmented parliament elected in February has been incapable of enacting a program to pull Italy from its two-year recession.

Bond Yields

Italian 10-year bond yields have fallen 1.65 percentage points to 4.41 percent since Draghi’s commitment. The country’s economy, which has contracted since the third quarter of 2011, showed signs of continued weakness as industrial production unexpectedly fell in July.

Berlusconi, a three-time ex-premier, precipitated the instability late yesterday by saying he had lost faith in the government and asking the five ministers from People of Liberty, or PDL, to step down. Minutes later, Alfano responded with a statement of his own saying the resignations were en route.

“All the polls tell us we’ll win” the next election, Berlusconi said today in comments broadcast by SkyTG24.

The disintegration of Letta’s parliamentary alliance would put Italy’s economy and its bonds at increased risk. Letta has sought spending cuts to bring the budget deficit this year within the European Union limit of 3 percent of gross domestic product. He was also pushing for cuts to eliminate a planned 1 percentage point increase in the value-added tax scheduled to take place Oct. 1.

VAT Increase

Berlusconi said he was pulling his ministers from the Cabinet because the government wasn’t doing enough to avoid the VAT increase. Letta disputed that assertion.

“Berlusconi is trying to justify his foolish and irresponsible move,” Letta said in a statement. “Italians will see through such an enormous lie and such an attempt to totally overturn reality.”

Berlusconi, now a senator, may be ousted from parliament as soon as next month. He is scheduled to present his defense in an Oct. 4 meeting of the Senate’s parliamentary immunities committee. If the panel recommends his expulsion, his fate will be decided in a vote of the full chamber. Letta’s Democratic Party has said his removal is required by a 2012 anti-corruption law.

Limited Mandate

Should Letta fail to secure a new majority, the alternative would be a government with a limited mandate and a tight time line to pass crucial reforms such as the election law and the budget stability law before a new vote, Il Messaggero reported.

“Needless to say, the ongoing political scenario is now expected to weigh on Italian BTPs,” whose yields and spreads versus other European countries’ debt showed “a great deal of nervousness over the past few weeks,” Annalisa Piazza, an analyst at Newedge Group in London, said in a note to clients today.

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 Sept. 27, the biggest increase since the period ended Aug. 23.

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