Italy Coalition Risks Collapse, Threatening Battle Against Virus

(Bloomberg) -- The government of Italian Prime Minister Giuseppe Conte is at risk of collapsing as a junior ally prepared to abandon the coalition as early as Wednesday, just as the administration seeks to push through measures to battle the pandemic and boost the economy.

Ex-Premier Matteo Renzi, leader of the Italy Alive party, will hold a news conference at 5:30 p.m. in Rome after a decision on whether to pull his two ministers out of the coalition in a long-simmering clash with Conte. Renzi’s party has only 3% support in opinion polls but a pullout would still rob Conte of his parliamentary majority.

Renzi’s ministers are expected to resign from the government in a letter they will send at 5 p.m. Wednesday afternoon, daily la Repubblica reported.

The timing could hardly be worse. Italy is battling a worsening coronavius pandemic and a recession, and has taken over the presidency of the Group of 20 nations. Cabinet meetings are due Wednesday evening and Thursday to approve new restrictions on movement and a plan to widen the country’s deficit by about 24 billion euros ($29 billion) to fund new stimulus.

Markets are watching. After sliding Tuesday, Italian bonds were trading steady at the start of the European session. Ten-year yields were at 0.65%, with the spread over their German peers at around 114 basis points, close to a one-week high.

“We don’t want to be in government at all costs, if you want us to be in the government, listen to our ideas,” Renzi said in an interview with Rai state television Tuesday night.

If the former premier makes good on his threat, Conte could seek a parliamentary vote of confidence. But if he fails to win over enough centrist and unaffiliated lawmakers, Conte’s government would become a caretaker administration with limited powers to make policy decisions. If he resigns, however, he could be given a mandate by President Sergio Mattarella to try to forge a new alliance.

Other possible scenarios following a Renzi pullout include a similar coalition with a different premier, a broad alliance headed by a figure like ex-European Central Bank president Mario Draghi, or early elections. Surveys show the center-right opposition would likely win a new ballot.

Renzi has taken Conte to task over his plan for spending Italy’s estimated 196 billion-euro share of the European Union’s recovery package. The plan was approved early on Wednesday during a night-time cabinet meeting, Conte’s office said in a statement.

The former premier has escalated pressure on Conte since late last year, slamming the prime minister’s plans for managing and spending EU funds. Renzi says the plan has been improved following his demands, but he’s insisting on further conditions, including that Italy tap a European Stability Mechanism credit line for health spending.

Renzi also wants Conte to share power with coalition parties, spend more on healthcare and give up control of the country’s secret services.