Berlusconi teeters as debt crisis deepens

Europe's widening debt crisis took a new turn Tuesday, one that saw Italy's controversial leader Silvio Berlusconi fighting for his political life.

As the Continent's nations race to come up with a permanent solution to their own indebtedness, the embattled Italian prime minister is now squabbling with his longtime coalition partner, Umberto Bossi, over economic reforms the EU is demanding over the next 24 hours.

Italy has become the epicentre of the crisis in the past few days, as closer inspection of Italy's finances has raised concerns that Europe's third largest economy may itself be a house of cards.

"Berlusconi has an immovable object at home which is Bossi and the Northern League, and an unstoppable force abroad which is the European Union, so he's in a very, very difficult position," said James Walston, a political science professor at American University in Rome.

Cracks emerge

European Union officials have pledged to come up with a comprehensive plan to solve the crisis and buttress the euro by Wednesday. As part of that, they are insisting that Italy enact comprehensive reforms before being given a say in what happens elsewhere on the Continent.

Italy's plan has to contain "concrete action" and "a clear time horizon," said European Commission spokesman Amadeu Altafaj Tadio. "What happens in Italy has an impact on all other eurozone countries," he said.

Among the moves would be a raising of the retirement age to 67, and change to taxation laws to encourage investment. The ideas are nothing new, but EU officials are only now cracking down on the 75-year-old leader to see that progress is made on promises he made years ago.

Berlusconi's problems began on Monday night, when his coalition partner Bossi refused to go along with his proposal, which conceded most of the EU demands. Bossi leads the Lega Nord, which represents the manufacturing and industrial northern part of the country. Berlusconi draws his support from the more rural south.

The Northern League staunchly opposes raising the pension age.

'Let's say the situation is difficult, very dangerous.' —Umberto Bossi

But it's a move that partners like Germany view as critical. Germany has already committed to raising its pension age to 67. Chancellor Angela Merkel will have a hard time explaining to voters at home why Europe's largest economy should be ready to help countries like Italy, whose workers will be allowed to retire years earlier.

Bossi himself conceded that the government is at risk. "Let's say the situation is difficult, very dangerous," he told reporters in Rome.

Ratings agencies have cited the government's inaction and failure to draft growth measures as reasons for downgrading Italy's growing debt, now $2.64 trillion, nearly 120 per cent of GDP and the second highest in the eurozone after Greece.

Despite the ratings agencies' lack of faith in Berlusconi, analysts in Italy caution that his ouster could bring months of political deadlock until a new parliament is elected. It would be up to Italy's President Giorgio Napolitano to decide to retain Berlusconi in power pending new elections, or install a technical government, which also would require the cooperation of parliament.

Problems remain

Elsewhere in Europe, negotiators were at loggerheads with banks and other private investors. To ease the burden on Greece which is struggling to meet the terms of its bailout loan already, they are trying to convince bondholders to take losses of as much as 60 per cent on their Greek holdings.

But the banks have indicated that they will not accept losses of that magnitude. In July, most of Greece's bondholders agreed to take 21 per cent haircuts on their Greek debt.

Forcing losses onto banks could trigger big payouts of credit insurance and cause turbulence in global markets, analysts warn.

"It would also likely have severe contagion effects, which would cost the European and the world economy dearly in terms of employment and growth," said Charles Dallara, managing director of a global banking lobby group involved in the negotiations.