UPDATE 3-Italy's Berlusconi defiant after parliamentary test

Tue Jun 21, 2011 12:24pm EDT

Related Topics

* Ital ian govt wins vote on measures to boost growth

* PM Berlusconi says govt to keep budget commitments

* Says govt fall would cause rise in cost of debt financing

(Adds comments from Berlusconi)

By Deepa Babington

ROME, June 21 (Reuters) - Italian Prime Minister Silvio Berlusconi pledged on Tuesday to stay to the end of his term in 2013 after winning a confidence vote that was his first test in parliament since two crushing electoral losses in recent weeks.

Berlusconi said the centre-right government would keep its commitment to control public finances and that planned tax reforms would not increase the budget deficit, which the government aims to eliminate by 2014.

Speaking just days after ratings agency Moody's warned it may cut Italy's credit rating because of concerns over its huge public debt, Berlusconi said his government was the only one capable of maintaining the confidence of international markets.

"If the government fell, we would immediately see the cost of financing our public debt rise," he told the Senate.

Earlier, the government won the lower house vote on measures to boost growth by a comfortable margin of 24 votes.

The motion passed with 317 deputies voting in favour and 293 against. Two lawmakers abstained.

However the victory may provide only brief respite for Berlusconi, reeling from heavy local election and referendum defeats and facing plummeting approval ratings, squabbling allies and a stagnant economy.

Analysts warn Italy, which has largely escaped the impact of the euro zone debt crisis through a tight clamp on public spending, high private savings and a conservative banking system, could pay a heavy price for failing to reform.

Both Moody's and Standard & Poor's have lowered their outlook on Italy over the past month, citing doubts about Italy's ability to cut a public debt pile equivalent to some 120 percent of gross domestic product.

The head of Fitch's sovereign ratings unit told Reuters on Tuesday the agency had no plans to change its rating or outlook on Italy at the moment, but warned that any tax cuts that are not matched by spending cuts would be worrying.

"The window of opportunity for the government to set the pace of the policy agenda is closing," Barclays Capital analysts said in a note. "Markets are likely to demand higher spreads unless Italy switches gears soon."

But Berlusconi is battling to keep his coalition together, with increasingly frustrated Northern League partners demanding tax cuts to boost growth and an end to Italy's costly involvement in the NATO-led campaign in Libya.

Asked if Berlusconi would see out the end of his term in 2013, the League's mercurial leader Umberto Bossi bluntly said: "If he does the right things, yes. We've already given Berlusconi a timeline."

WANING FORTUNES

Berlusconi said on Tuesday that his alliance with the Northern League was "loyal and solid" and they would carry out constitutional, judicial and fiscal reforms together.

A separate vote in the lower house to verify whether the government enjoys a majority may be called on Wednesday.

Berlusconi faces a bigger test in coming weeks when he must push through austerity measures totalling about 40 billion euros ($57 billion) to eliminate the budget deficit by 2014 -- a task made even more arduous by the League's demand to cut taxes.

Italy has a relatively modest deficit by euro zone standards, expected at 3.9 percent of GDP this year, but chronically sluggish growth has made it almost impossible to make inroads into the debt.

Well-known for bouncing back from the most difficult of situations, Berlusconi managed to wave off a series of sex scandals soon after sweeping to power in 2008.

But his fortunes began to wane after an acrimonious split with Gianfranco Fini, his old ally, last year that ended his guaranteed parliamentary majority.

A string of corruption cases, the sluggish economy and a scandal involving an underage prostitute have taken their toll on the premier, whose support among voters now stands at a record low of 29 percent, according to pollsters IPR.

The government's sagging support even among its core northern power base was underscored by the loss of the Milan mayoral seat in local elections last month. That was followed by defeats in referendums on nuclear energy, water privatisation and trial immunity for government ministers. (Additional reporting by Catherine Hornby, Editing by Janet Lawrence) ($1=.7028 Euro)

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