Berlusconi, stumbling economy raise heat in Italy

Italy's coalition government came under growing pressure on Wednesday from members of Silvio Berlusconi's centre-right party protesting the former premier's legal troubles and from bad news on the economic front.

Lawmakers from the People of Freedom party, a key member of the coalition, said they wanted to boycott parliament for three days in protest after Italy's top tribunal announced a key court date for Berlusconi.

The hearing could deliver a final verdict in a tax fraud case against Berlusconi that might mean a five-year ban from politics and a one-year prison term.

It is set for July 30 -- far earlier than expected.

Berlusconi supporters condemned what they said was a "plot" against their leader and an example of "arbitrary justice", and one particularly ardent senior party member threatened to bring down the government.

Berlusconi has already lost one appeal in what is one of several ongoing cases against the billionaire tycoon, who was convicted last month of having sex with an underage prostitute and abuse of office.

The court said in a statement on Wednesday that it scheduled the earlier date for the hearing because one of the charges in the case risked expiring under a statute of limitations on August 1.

Prime Minister Enrico Letta, whose government was only installed two months ago after a tough compromise with Berlusconi, meanwhile called for "team spirit" and a "cohesive community" to overcome the economic crisis.

The political rumblings come at a sensitive time for the Italian economy, which has endured two years of recession that shows little sign of easing just yet.

Standard and Poor's on Tuesday lowered its ratings for Italy, putting it on the same level as Bulgaria and slightly below Russia, warning that the deficit could go higher than expected and cuttings its growth forecast.

The news came after the International Monetary Fund last week also cut its forecast for Italy this year to a contraction of 1.8 percent, although it predicted better than expected growth of 0.7 percent in 2014.

Christian Schulz at Berenberg bank said Tuesday's downgrade was a sign that the general election in February and the two-month political deadlock that ensued "may have weakened fiscal discipline".

"Recent steps like the postponing of a VAT (value-added tax) increase and modest investment programmes signal further slippage ahead," he said.

Politically, he said, the effect may be favourable.

"The rating downgrade may help Prime Minister Letta to restore a sense of realism and urgency," he said.

Analysts at UniCredit, Italy's biggest bank, said the downgrade might cause some "short-term volatility" but would have a "very limited impact" on borrowing costs.

They said the timing was surprising "considering the recent data releases supporting the view that we might see the end of the recession before year-end".

They also noted that Italy was in a "very favourable" funding position on debt markets since the Italian Treasury had completed 66 percent of its medium- and long-term funding requirements for the year.

There were also some encouraging reports on Wednesday, with new data showing industrial output had inched up 0.1 percent in May after three consecutive decreases.

The Italian Treasury also placed 7.0 billion euros as expected in a sale of 12-month bonds, although it was forced to do so at a higher rate than last month.

"We can see the first signs" of recovery, Finance Minister Fabrizio Saccomanni said after the auction.

But Italy's central bank governor Ignazio Visco said the country was still in a "difficult transition".

"The margins of uncertainty on the timing and the intensity of a recovery are high because of the risk of a slowdown in the global economy," Visco said.