By Eric J. Lyman
ROME, Aug. 23 (Xinhua) -- Government talks over the political fate of beleaguered former Prime Minister Silvio Berlusconi have reportedly broken down, casting new doubt on the staying power of Italy's budding economic recovery.
Berlusconi's conviction for false accounting and tax evasion has been upheld by Italy's Supreme Court early this month -- it was Berlusconi's first definitive conviction ever, after two decades of legal problems -- and a year of house arrest and possible ban from politics now loom.
That puts the medium- and long-term health of Prime Minister Enrico Letta's government on shaky ground. The government was formed in April after an uneasy truce, with Berlusconi's party the second leading member of the coalition.
Before the verdict, Berlusconi said he would honor the court's decision, but since then he has taken the opposite tact. The 76-year-old billionaire told supporters this week via social media, "I won't step down! I'm resisting!"
And key Berlusconi supporters in the government -- most notably Renato Brunetta, the whip for Berlusconi's party in parliament's lower house -- have made it clear that if parliament strips Berlusconi of his Senate seat when it meets on September 9 their support could be pulled.
If that happens, it would force the government to collapse.
The political uncertainty comes at a bad time for Italy's sputtering economy. Some positive indicators have been trickling in in recent weeks, ranging from improving consumer sentiment and firmer industrial production levels to newly stable government bond yields and government predictions of positive growth as soon as the end of this year. But the situation remains tenuous.
"The really bad economic news has stopped and there has been some small bits of good news coming in," said Oliver Rossetti from Milan's ABS Securities. "But all bets are off if there's a protracted political crisis that makes it difficult for the Letta government to govern, or if the government collapses. Everything is predicated on a stable government being in place and following through on reforms."
That stance is not surprising. The U.S. ratings firm Standard & Poor's called the risk of political instability one of the two biggest obstacles for the Letta government's efforts to spark growth in a note earlier in the summer (the country's high debt levels were the second obstacle). And Letta himself, earlier this week, warned that his government needed to stay in power to see through the reform process and shepherd the economy to positive growth.
So far, financial markets appear to have shrugged off the notion that Berlusconi could make the government collapse. The blue chip index Italian Stock Exchange in Milan has been choppy since the Berlusconi verdict but is higher now than it was when the verdict was handed down, after two straight positive sessions to close the week. Yields for Italy's benchmark ten-year binds rose slightly this week, but still remained in a healthy range, closing the week with a 4.33 percent yield on secondary markets.
But Michele Di Gregorio, a retired bank of Italy economist, said the markets could turn quickly.
"Right now, there is a positive perception of the work the Letta government is doing and the European Union continues to support the economy," Di Gregorio said. "If the government falls or appears at risk of falling, both of those things could change in a hurry and then watch out. The markets can react very quickly."