Berlusconi Uses Threats, Promises in Desperate Bid to Keep Power

With Silvio Berlusconi's fate resting on a group of party rebels threatening to pull the rug from under his government next week, the Italian prime minister is using carrot and stick to try to win over the doubters and pull off yet another parliamentary escape.

Estimates vary widely over how many center-right deputies will jump ship in a crunch vote on public finance in the Chamber of Deputies on Tuesday. Berlusconi's message to potential traitors is clear: You have nowhere else to go and you will be rewarded if you stay.

The 75-year-old media tycoon has defied all calls to step down and is adamant that he can battle on.

We have checked in the last few hours and the numbers are certain, we still have a majority, he told party followers on Sunday.

Newspapers have estimated the number of potential defectors at between 20 and 40, which would be more than enough to bring down the government, but in previous narrow escapes Berlusconi has proved his powers of last-minute persuasion.

He has been meeting and telephoning rebels since he returned from a humiliating international summit in France on Friday which agreed the International Monetary Fund would visit Italy quarterly to check its progress in passing long-delayed reforms.

A deputy from his ruling coalition said after meeting Berlusconi that the premier was ready to reward doubters with well-deserved jobs in government. Berlusconi said on Friday defectors would be betraying the government and the country.

Italy is the third biggest economy in the euro zone and its political woes and debt worries are seen as a huge threat in the wider crisis facing the single currency.

Berlusconi's latest assurance over his majority may be bad news for Italian bonds, which sold off again on Friday to push their yield to a record euro-era high above 6.4 percent. The spread over German bunds, reflecting the higher risk premium investors place on Italy, also hit a record above 4.6 percentage points.

Bond prices would recover and the yield spread would fall by a full percentage point if the government should fall, according to a Reuters survey of 10 fund managers, market analysts and strategists last week.

Economy Minister Giulio Tremonti was forced to deny reports that he had forecast a catastrophe on financial markets next week unless Berlusconi stepped down.

ECB DOUBTS

European Central Bank council member Yves Mersch underscored the high stakes on Sunday, saying in a press interview that the ECB frequently debates the option of ending its purchases of Italian bonds unless Rome delivers on reforms.

Without that bond-buying program, the run on Italian bonds would probably already have spiraled way out of control.

Berlusconi on Sunday rejected talk of being succeeded by an unelected technocrat government or a political administration with the backing of all the forces in parliament, saying: The only alternative to this government would be elections.

He also seemed to be having second thoughts over the IMF monitoring, saying the initiative for the visits came from us and we can withdraw it whenever we want.

Commentators say the behind-the-scenes maneuvers are reminiscent of the so-called first republic that ruled Italy for nearly 50 years after World War II, when new governments were constantly formed and dismantled in parliament by the many factions of the all-powerful Christian Democrat party.

Many of the center-right waverers are ex-Christian Democrats and are being tempted by offers from the small, centrist UDC party to join forces behind a new government with broad cross-party support spanning both the center-right and the opposition.

These negotiations will continue even if Berlusconi wins Tuesday's vote to ratify 2010 public accounts, with no let-up in the atmosphere of intrigue and above all uncertainty ahead of more key votes on budget measures due later this month.

Lower house speaker Gianfranco Fini, a former ally and now arch-enemy of the prime minister, made the point strongly when he appealed to Berlusconi to resign on Sunday.

The government must understand that it is not credible even if it wins in parliament by a vote, because with a majority of one vote you can survive but you cannot govern.

(Editing by Mark Trevelyan)