MercoPress. South Atlantic News Agency

Doubts Italy’s divided government can pass measures to cut budget and debt

PM Silvio Berlusconi and Economy Minister Giulio Tremonti confronted over the cuts

ECB President Jean-Claude Trichet kept up warnings over Italy's strained public finances telling the struggling centre-right government it must act quickly to reassure nervous markets.

Prime Minister Silvio Berlusconi, hit by a renewed bout of scandal this week, has caused growing alarm over the failure of his divided government to pass clear measures to cut back Italy's 1.9 trillion Euro debt mountain.

Speaking after a week of steadily rising market pressure on Italian bonds, Trichet repeated that the government had to meet last month's pledge of a clear plan to balance the budget by 2013 and pass reforms to boost Italy's stagnant economy.

“This is absolutely decisive to consolidate and reinforce the quality and the credibility of the Italian strategy and its creditworthiness” he told a conference in the northern Italian town of Cernobbio which echoed similar comments a day earlier.

The European Central Bank has been buying Italy's bonds in the market to try to hold down yields and stop its borrowing costs spiraling out of control.

There has been some speculation that it might reduce its bond purchases to put pressure on Rome to act more quickly to pass a much disputed 45.5 billion Euro package of austerity measures now going through parliament.

However, any sign of the ECB cutting back its bond-buying program would risk triggering a market sell off that could tip the Euro zone's third economy into a Greek-style emergency.

Foreign Minister Franco Frattini said Rome would be pressing the ECB not to withdraw his support and added that he was confident it would not halt its intervention.

Underlining the growing urgency of the situation, the premium investors demand to hold Italian debt rather than benchmark German bonds rose Friday to 331 basis points, the highest since the ECB started buying Italian paper in August.

Italian President Giorgio Napolitano said successive governments had failed to prevent a mountainous public debt from getting out of control, and swift action was essential.

Napolitano has played a prominent role in the crisis, using his authority as head of state to cut through political rivalries and broker a series of agreements on budget measures.

But cabinet divisions have hampered efforts to finalize the package. Economy Minister Giulio Tremonti appears increasingly at odds with Berlusconi and the rest of the government.

Speculation persists that the government may fall before the end of its term in 2013, perhaps to be replaced for a limited time by a government of technocrats.

Saturday, Berlusconi's office denied a report in the daily Corriere della Sera that he had attacked Tremonti's insistence on budget rigor even at the expense of economic growth, the latest in a long series of such reports.

Disagreements over taxes and pensions have led to a series of U-turns over the past week. A tax on high earners and a rise in the pension age have been proposed and then dropped within days.