Italian Pm Says Facing Maddest Crisis In World

Italian Prime Minister Romano Prodi, facing the biggest challenge to his 17-month-old government, on Wednesday rejected demands from his rebellious hardline ally Communist Refoundation to re-write his 1998 draft budget.

This is not possible. The budget has been meditated and thought out, Prodi told reporters after one hour and 20 minutes of crisis talks with President Oscar Luigi Scalfaro.

It is possible to add complementary measures, but it is not possible to take back the budget itself...I always keep dialogue open, (but) Im standing firm with respect to the contents of the draft budget, he said.

Prodis centre-left coalition appeared to be headed on a collision course with the hard-left party after it refused to back the deficit-cutting budget, which the government considers essential to fulfil its goal of joining a single European currency at the outset.

 

We are facing the maddest crisis in the world, Prodi told Italian state broadcaster RAI before meeting Scalfaro.

I am doing everything to avoid a crisis which would hit those who are the weakest (members of society), he added.

Prodi said he would not accept a new parliamentary majority, meaning he would step down rather than head a new coalition government, a move which could possibly kill off the first Italian government since World War Two to include the left.

Scalfaro, who has the sole right to dissolve parliament, was believed to be fiercely opposed to a general election 3-1/2 years ahead of schedule.

Massimo DAlema, leader of the Democratic Party of the Left (PDS), the biggest party in government, said he feared early elections would be unavoidable if there were a full-blown government crisis.

The Communist Refoundation dug in its heels, repeating its demand that talks with the government could only begin if it withdrew its draft budget.

We are ready to talk to the government at any time provided we start from scratch, party chairman Armando Cossutta said.

Prodi unveiled the 1998 budget at the weekend and despite vehement opposition from Refoundation included some five trillion lire ($2.9 billion) of cuts to welfare spending.

Refoundation, which has ensured Prodis majority in the lower Chamber of Deputies, says the budget contains unacceptable cuts in welfare and pensions.

Refoundations refusal to back the budget leaves Prodi without a majority in the lower house Chamber of Deputies and raises the risk of a government collapse.

Parliamentary party leaders were to meet at 9.30 p.m. (1930 GMT) to fix a time for a full parliamentary review.

The mood grew gloomier as the day wore on. Finance Minister Vincenzo Visco said he thought there was no way of averting the deepening government crisis.

Asked by Reuters whether he agreed that there was no room to manoeuvre, Visco said: Effectively, it looks that way.

Treasury Minister Carlo Azeglio Ciampi, presenting the 1998 budget in the Senate, pleaded that the governments achievements in putting the economy on the right track for European economic and monetary union should not be wasted.

While Italian bonds and stocks wobbled, brokers appeared more sanguine than the politicians, confident that the situation could be resolved.

The probability of an agreement is still high as no one wants early elections, said Luca Jellinek, bond strategist at Paribas Capital Markets.

Despite the crisis, an official from Prodis office confirmed the prime minister would attend a Franco-Italian summit in the French town of Chambery on Thursday and Friday.

Italian markets, which have grown used to the recent months of relative political calm after years of rapidly changing government, slid on news of the crisis.

The Milan bourse Mibtel index fell four percent, but recovered to stand three percent down by the close. Bond futures, a critical indicator of market confidence, fell nearly one whole point but recovered considerably in later trade.