| CERNOBBIO, Italy
CERNOBBIO, Italy Economy Minister Fabrizio Saccomanni expressed hope on Saturday that Italy's fragile ruling coalition could avoid a breakdown which he warned would threaten strained finances and risk wrecking credibility won during months of painful austerity.
Saccomanni's comments follow weeks of tension over the political future of center-right leader Silvio Berlusconi following his conviction for tax fraud last month.
"I am confident, I believe there won't be a crisis," he told reporters on the sidelines of a business conference in the northern Italian town of Cernobbio.
Allies of the former premier have said the center-right could pull out of Prime Minister Enrico Letta's coalition if center-left members of a Senate panel vote to strip Berlusconi of his seat in the upper house of parliament.
However, senior allies of the 76-year-old media billionaire have struck a more conciliatory tone in the past two days, raising hopes that a crisis may be averted.
"The country needs responsibility. We have guaranteed this sense of responsibility today," Renato Schifani, the floor leader in the Senate of Berlusconi's People of Freedom (PDL) party, told SkyTG24 television.
The panel begins meeting on Monday, but it may take weeks for the complicated procedure that could lead to Berlusconi's expulsion from parliament to be completed.
Political risks have weighed on Italian government bonds in recent sessions and analysts say Rome could see weaker demand and be forced to pay higher yields at a bond auction next week, unless investors receive some reassurance the government will hold.
A breakdown of the coalition, raising the prospect of early elections at a time when Italy should be planning next year's budget, would push yields on Italian government bonds further up, increasing debt payments, Saccomanni warned.
"Fresh tensions on government bonds would make it more difficult (for Italy) to manage the budget deficit and keep it within the 3 percent limit," he said.
"UNFORGIVABLE LOSS OF CREDIBILITY"
Italy is targeting a 2013 deficit of 2.9 percent of output, a fraction below the European Union's 3 percent ceiling, and has been removed from the EU's list of countries in excessive deficit, but it faces growing headwinds as its longest postwar recession has continued.
Saccomanni said Italy, which came close to dragging the euro zone into a life-threatening crisis in 2011, could not afford to be put back under the constraints of the special list considering it would hold the rotating European presidency in the second half of next year.
"It would be a totally unforgivable loss of credibility," he said.
A worse-than-expected economic contraction and a recent agreement to modify an unpopular property tax threaten Italy's deficit commitment, and some analysts say it will need to take additional belt-tightening measures.
Saccomanni said Italy, with a youth unemployment rate running at about 40 percent, still aimed to cut taxes on labor in a bid to spur job creation.
Italian Labor Minister Enrico Giovannini said measures to fund a lower tax burden on labor would be included in the budget law to be presented in mid-October.
Saccomanni expressed confidence about a state bailout for Italian bank Monte dei Paschi di Siena (BMPS.MI) that needs EU approval ahead of a meeting with EU Competition Commissioner Joaquin Almunia in Cernobbio on Saturday.
"I believe the prospects are positive, we've done a good job."
Monte dei Paschi received 4.1 billion euro ($5.4 billion) in state aid earlier this year to plug a capital shortfall. But the European Commission is demanding it toughens up its restructuring plan before it approves it.
(Writing by Valentina Za; editing by James Mackenzie and Mike Collett-White)