Italian parties rally behind Monti as crisis looms

Monti Berlusconi.jpg

Italy's divided political parties restated their support for Prime Minister Mario Monti at the weekend, seeking to calm fears of instability that helped drive Rome's borrowing costs to dangerous levels last week.

Monti's office dismissed an unsourced report in the Corriere della Sera that he was considering an early election in the autumn and the parties that back his technocrat government ruled out withdrawing their support in parliament.

"There is no risk to the government, given the overall weakness of the international situation. Noone will risk opening a government crisis," Fabrizio Chicchito, parliamentary leader of the centre-right PDL party, told the daily Il Tempo.

Enrico Letta, deputy leader of the centre-left Democratic Party, also dismissed talk of early elections. "The government is doing it's work and doing it well," he told SkyTG24 television.

Markets fear political deadlock

Markets have reacted sharply to fears of deadlock after elections early next year when Monti's technocrat administration is due to step down, pushing Italy's borrowing costs to levels which threaten to spiral out of control.

Political uncertainty was cited by ratings agency Moody's when it cut Italy's credit rating by two notches earlier this month but Treasury officials have dismissed fears that Italy may face difficulty on the market, where it still needs to raise another €170 billion by the end of the year.

However pressure has grown with yields on Italy's 10-year bonds now at 6.2%, more than 500 basis points higher than safer German Bunds, reflecting the political fears as well as concerns about a spillover in the debt crisis in Spain and Greece.

Monti, who has ruled out running in 2013, has done much to restore Italy's international credibility since financial market turmoil forced out former Prime Minister Silvio Berlusconi last year but he has faced an increasingly hostile climate at home.

He has pushed through a series of tax hikes, spending cuts and reforms aimed at reining in Italy's €2 trillion public debt pile and strengthening its stagnant economy which have been bitterly resented by critics on both the left and right.

He has faced growing discontent at austerity measures which have lifted tax rates to record levels and sniping from all sides but any serious political revolt has been held back by fears of market fury were his government to be toppled.

Doubt over Berlusconi comeback

On Sunday (22 July), there was fresh uncertainty about one of the big questions hanging over next year's election, the possible return of Berlusconi as candidate of the centre-right.

Libero, a newspaper traditionally very close to the billionaire media entrepreneur, reported on Sunday that the idea of Berlusconi running in 2013 was not a serious plan but a kind of "joke" on his part.

The report was swiftly denied by Berlusconi's office but Il Giornale, a newspaper owned by his own brother, said the former premier would not decide until October whether he would really run in the election or play a behind-the-scenes role.

The PDL has struggled to contain its internal divisions following Berlusconi's departure, with hardline loyalists sounding an increasingly anti-euro line at odds with the party's traditionally pro-European conservatives.

However recent opinion polls suggest that even if Berlusconi returns, he would lose an election to the centre-left and leave the PDL battling the anti-establishment Five Star Movement of maverick comedian Beppe Grillo for second place.

Much will depend on whether the squabbling parties can reach an agreement on a reform to Italy's universally criticised electoral laws, described even by the former minister who oversaw their introduction in 2005 as a "porcata" (crap).

For months, party officials have been discussing changes to the system, which allows voters to choose only a party or coalition group not individual candidates but they have so far failed to reach an agreement which would allow planning for the elections to begin in earnest.

Italy's mix of chronically low growth, a public debt mountain of €1.84 trillion, or 120% of GDP, and a struggling governing coalition are causing growing alarm on financial markets.

The country, which has been politically unstable for years, would need at least €600 billion in the case of a bailout, more than the balance of the eurozone's current bailout fund.

Prime Minister Mario Monti, when he took office five months ago, signed up to predecessor Silvio Berlusconi's goal of balancing Italy's budget by next year.

Challenges to that target have grown, however, as the €30 billion austerity plan that Monti rushed through at the end of last year, made up largely of tax increases, is partly to blame for this year's recession, which has in turn worsened the outlook for public finances.

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