Italy on Verge of Downgrade to Junk; Silvio Berlusconi’s Supporters Threaten Mass Resignation from Parliament

ItalyonVergeofDowngradetoJunk; SilvioBerlusconi’sSupportersThreatenMassResignationfromParliament

Silvio Berlusconi supporters threatened to resign form Italy’s parliament en masse today, even though a week ago Berlusconi himself said he would not end the coalition. To someone in the US, such a ploy makes little sense, because as soon as you resign, you lose your vote.

Parliamentary rules described below suggest there may be some merit in the idea, but I still think a coalition collapse by ordinary means (withdrawing support) is more likely. Regardless, one way or another, the threat of a coalition collapse is back in the picture.

In response to the threat of a government collapse Standard & Poor’s warned of a further downgrade “by one notch or more” if Italy could not demonstrate “institutional and governance effectiveness”. Italian sovereign debt is just two notches above junk.

The Financial Times reports ItalyPMLettareturnstoresignationthreatfrom centre-right

Fresh from assuring potential Wall Street investors that Italy was “young, virtuous and credible”, prime minister Enrico Letta was heading back to Rome late on Thursday to save his coalition government from collapse after Silvio Berlusconi’s supporters threatened a mass resignation from parliament.

The 76-year-old former prime minister – convicted last month for tax fraud and also appealing against a separate conviction for paying for sex with an underage prostitute – threw the government into chaos on Wednesday night when his centre-right Forza Italia party warned it would quit parliament if a senate committee voted to expel its leader from the upper house next month.

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.

A mass resignation from parliament would cause legislative chaos just when the government must seek approval for its 2014 state budget. Parliamentary procedures dictate that each resignation must be voted on individually, a process that would have to be repeated if deputies nominated to replace them also resigned.

Renato Brunetta, lower house leader for Forza Italia, told the Financial Times he was already collecting resignation signatures from the party’s 188 MPs. He declined to say how many he had received so far.

With the head of state adamantly opposed to dissolving parliament, politicians are scrutinising whether Mr Letta could find the 30 or so votes he would need in the senate to form an alternative majority. Opinion polls show that elections would lead to a repeat of February’s hung parliament, with the anti-establishment Five Star Movement once again holding the balance of power.

Time Running Out For Letta Coalition

Even though Berlusconi is prone to change his mind frequently, and his supporters make threats they do not carry out, it appears this time, one way or another, the Letta coalition is nearly finished.

Italy’s president, Mr. Napolitano, said he would not succumb to pressure to dissolve parliament and call new elections, but what other choice can he make, unless Letta picks up votes from Beppe Grillos’s 5-Star Movement?

Mike "Mish" Shedlock

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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