Italian coalition in disarray after Berlusconi's ministers quit

Italy's former Prime Minister Silvio Berlusconi on July 1 in Milan, Italy.

Italy's left-right coalition government was on the edge of collapse on Saturday night after former prime minister Silvio Berlusconi pulled out his five ministers from the alliance he formed with Enrico Letta's Democrats last April.

Mr Berlusconi, leader of the centre-right Forza Italia party, said the resignations were a response to the government's decision on Friday to increase in sales tax from next month.

Mr Letta, prime minister, rejected Mr Berlusconi's explanation as an "enormous lie", and called the decision "mad and irresponsible and aimed exclusively at covering up his personal affairs" -- a reference to Mr Berlusconi's criminal conviction for tax fraud which is likely to lead to a ban on holding public office.

The unprecedented coalition of the two parties -- forced upon both sides by elections last February that ended in deadlock -- has been hanging by a thread since Mr Berlusconi lost his final appeal against tax fraud on August 1.

The crisis gathered pace on Wednesday night. Just as Mr Letta was in New York telling investors on Wall Street that Italy was "young, virtuous and credible", Mr Berlusconi's parliamentarians threatened to stage a mass resignation if a senate committee voted on October 4 to strip their leader of his seat in the upper house.

The way ahead is fraught with difficulties for Mr Letta and his ally Giorgio Napolitano, head of state, with little time to prevent a serious fallout on financial markets on Monday. Rumours were already spreading last week that Italy was heading for another downgrade by a major rating agency.

In downgrading Italy to just two levels above junk status in July, Standard & Poor's warned of a further downgrade "by one notch or more" if Italy could not demonstrate "institutional and governance effectiveness". As Mr Letta has repeatedly warned, Italy can ill-afford higher costs in servicing its €2tn of public debt, with its budget deficit for 2013 currently forecast to overshoot the 3 per cent limit agreed with the EU.

Mr Letta confirmed in his statement that he would go before parliament "where everyone will assume their own responsibility in front of the country". Commentators expected Mr Letta to address parliament on Monday, but it was not clear if he would immediately call a vote of confidence in the government.

Inconclusive elections last February left the centre-left Democrats with a majority in the lower house but 51 seats short of a majority in the senate, where the anti-establishment Five Star Movement holds the balance of power between the two mainstream parties.

Beppe Grillo, the comic-activist leader of the movement, who has ruled out supporting a government led by the Democrats, on Saturday night called for snap elections. But his autocratic style of leadership and a purge of several parliamentarians who refused to toe Mr Grillo's line have fuelled speculation that the Democrats might just be able to put the numbers together to form an alternative majority, including centrists led by former prime minister Mario Monti. Equally it is not clear whether all Mr Berlusconi's MPs will remain loyal to their billionaire leader of the past two decades who turns 77 this weekend and is facing a year of house arrest or performing community service.

Mr Napolitano, who holds the constitutional power to dissolve parliament, has repeatedly expressed his opposition to holding snap elections. But if Mr Letta's government were to fall and no alternative majority was in sight, then Italy could be faced with the unprecedented and extremely worrying prospect of staging elections before the end of the year at the risk of derailing the 2014 budget.

Stefano Fassina, a leftist deputy finance minister, warned that if Italy went to the polls then the budget would end up being written by the so-called Troika of the European Commission, European Central Bank and International Monetary Fund.

Such an outcome was averted in late 2011 when Mr Berlusconi's then-centre-right government was disintegrating under the combined pressure of internal rifts, panicking financial markets and his European peers. But instead of dissolving parliament, Mr Napolitano persuaded Mr Berlusconi to resign and replaced him with Mr Monti at the head of a caretaker government of technocrats. That experience -- ultimately unpopular with Italians and also politically destabilising -- is unlikely to be repeated.