UPDATE 1-EU bailout fund opens rift in Italy's coalition, PM calls for calm

(Adds comment by PM Conte)

ROME, April 15 (Reuters) - Italy’s ruling parties are divided over whether to use the European Union bailout fund to help the country’s coronavirus-battered economy, potentially weakening the government as it struggles to bring the epidemic under control.

A half-trillion-euro support package agreed by EU finance ministers includes funds managed by the European Stability Mechanism (ESM), which Italy has always declined to use in the past to avoid tough fiscal conditions.

Prime Minister Giuseppe Conte said last week Italy would continue to eschew the ESM and battle instead for the issuance of common debt, which is opposed by Germany, Austria, Finland and the Netherlands.

But Conte’s position is being contested by the centre-left Democratic Party (PD), the second-largest party in the governing coalition led by the anti-establishment 5-Star Movement.

The PD says the terms of the new ESM package, which are not premised on any policy or budgetary conditions other than that the money be used for health needs, means it would be self-defeating to decline it.

“If we can obtain billions in support of health care, without conditionality and respecting Italian sovereignty, I believe that we will have to take these resources. We need them for hospitals,” PD leader Nicola Zingaretti told reporters.

5-Star continues to see the ESM as a threat to Italy’s economic autonomy and has warned Conte, who is not a member of either party but is seen as closer to 5-Star, not to change tack.

Its leader Vito Crimi on Wednesday called the ESM a “rip-off”, adding that 5-Star, the biggest party in parliament, would never endorse its use. He added that at some stage EU institutions will impose budget and fresh policy conditions on countries that accept ESM funds.

Conte will have to settle the dispute before a video conference among European leaders on April 23 when Italy will be expected to make its position clear.

He tried to defuse the quarrel on Wednesday, warning in a Facebook post that the ESM “risks dividing the whole of Italy,” and adding that more information was needed on the terms of any credit lines before a final decision could be taken.

Until these details are clear, discussing whether an ESM loan is in Italy’s interests is “a merely abstract and schematic debate,” Conte said.

Italy’s death toll from the coronavirus is the second highest in the world after that of the United States.

Its economy, which was already close to recession before the virus hit and has barely grown for decades, is likely to shrink 9.1% this year, the International Monetary Fund said on Tuesday.

The 5-Star’s opposition to the ESM is shared by the main opposition parties, led by Matteo Salvini’s right-wing League.

Underscoring its divisions, the coalition said on Wednesday that Conte would not seek a parliamentary vote next week giving him a formal mandate to negotiate at the EU video-summit, angering the opposition.

“They have gagged parliament”, said Riccardo Molinari, the League’s lower house leader. ($1 = 0.9200 euros) (Editing by Gavin Jones and Catherine Evans)