Italy's leftist Letta has new government in his sights

Italian leftist Enrico Letta was expected to reveal Saturday whether he has succeeded in uniting the country's feuding parties and persuading the old guard to step aside for a government of fresh talent.

The moderate Letta, who has led two days of consultations with the parties in a bid to form a coalition, was said by sources close to his staff to be on the point of persuading the bickering left and right to work together.

Once differences between Italy's centre-left Democratic Party (PD) and Silvio Berlusconi's People of Freedom party (PDL) have been ironed out, Letta will formally accept the nomination of prime minister from President Giorgio Napolitano.

He will then be sworn in along with his new cabinet, before a handover ceremony with the departing Mario Monti, whose government has limped on in a caretaker capacity since December.

The government will then be put to confidence votes in the two houses of parliament.

Most observers were upbeat about Letta's chances, as he met with Berlusconi and the former head of the centre-left, Pier Luigi Bersani, in a bid to close the deal on Saturday.

But others warned that the sparring left and right risked thwarting coalition plans and worsening Italy's political and economic situation.

"In spite of the many optimistic forecasts, last night was worrying," said editorialist Marcello Sorgi in La Stampa daily.

The prime minister-designate had earlier said his attempt to put together a coalition had encountered "difficulties", and there were signs Saturday that negotiations were dragging on.

The parties are acting as if "the government being created is an alliance formed with a pistol to its head," said Luciano Fontana in Italy's best-selling Corriere della Sera daily.

Conditions imposed by both sides "are complicating the deal's closure, to the point it risks failure," he warned.

The 46-year-old has said he wants to move quickly to tackle the social fallout of a painful recession and Napolitano has been urging him to include younger ministers and women in his cabinet to help renew the country's tired political scene.

But cross-party unity has demands attached.

Negotiations have been trickiest with the scandal-tainted billionaire tycoon Berlusconi, who has insisted on the abolition and repayment of a controversial housing tax introduced in 2012.

Such a move would set the budget back some eight billion euros ($10.4 billion) in a country suffering from its longest recession in 20 years.

Furthermore, Letta's own PD, which narrowly won inconclusive general elections in February, is deeply divided over going into government with Berlusconi's centre-right.

The PD said on Friday it would unanimously support Letta, but there were rumblings from disgruntled rebels.

There have been calls from both sides to prevent rival figures from Italy's political scene from grasping ministerial posts -- with Berlusconi, Monti and former premiers Giuliano Amato and Massimo D'Alema the names most fiercely contested.

Most analysts say that the parties will eventually find a way to work together under Letta because the alternative would likely be fresh elections -- which neither side would necessarily win with the majority needed to govern.

The question is whether they can be persuaded to compromise on key aspects of government policy and ministerial appointments before the markets open on Monday, after which they risk international investors voicing concerns over Italy's political stability.

Moody's affirmed Italy's Baa2 rating and negative outlook Friday, warning the country's medium-term prospects for economic growth remained "weak".

The ratings agency said "strong fundamentals" and the government's primary surplus were encouraging signs, but that there was an "elevated risk that the Italian sovereign might lose investor confidence and, ultimately, access to private debt markets as a result of the political stalemate."

Berlusconi has ruled out his own inclusion in the cabinet, but his critics said the tycoon is the real victor of the institutional crisis which has gripped the eurozone's third largest economy.

In two trials due to resume next month, he is appealing a tax fraud conviction and defending himself on charges of having sex with a 17-year-old prostitute -- but his popularity levels have recently been on the up again.

Observers say that means he can push for Letta to choose ministers likely to favour him and the right, and offer him some longed-for protection in his legal battles.

If he succeeds in getting his way with the housing tax or ministerial postings, "it will show he is the real driver behind the government," said Piero Ignazi in La Repubblica daily.