Italian Prime Minister Enrico Letta defied Silvio Berlusconi’s attempt to force snap elections and said he plans to seek a new parliamentary majority to salvage his stricken government.

Letta said he’ll request a confidence vote for Oct. 2 to try to save his five-month-old administration after Berlusconi, a partner in the ruling coalition, withdrew his support and pulled his ministers from the cabinet. The turmoil puts leadership of the euro-area’s third-biggest economy in question as Germany, the bloc’s largest member, awaits clarification on the constellation of Chancellor Angela Merkel’s coalition.

Political instability threatens to hurt the four-year fight to tame speculation in Europe’s sovereign debt market. The rift between Letta and Berlusconi, a three-time prime minister, has pushed up Italian bond yields and impaired the country’s ability to deliver on its budget commitments.

“Protracted political impasse along with any delays in the formation of the grand coalition in Germany do not bode well for swift euro-area policy decisions,” Fabio Fois, an analyst with Barclays Plc (BARC), said in a research report. The end of the Letta-Berlusconi partnership “should keep volatility on the Italian government securities market high.”

Italian 10-year bond yields rose 13 basis points to 4.5 percent at 9:08 a.m. in Rome today, pushing the difference with German bunds to 279.4 basis points.

Senate Votes

Berlusconi, the 77-year-old billionaire whose legal troubles have him facing expulsion proceedings in the Italian Senate, announced his withdrawal on Sept. 28, when markets were closed.

Letta needs 24 votes in the Senate to secure a new majority without Berlusconi, Corriere Della Sera reported. To do so, the 47-year-old premier must win over opposition lawmakers or convince members of Berlusconi’s People of Liberty party to abandon their leader.

Letta’s plan to appeal to lawmakers won an endorsement yesterday from President Giorgio Napolitano, who is responsible for calling snap elections if parliament is deadlocked. Napolitano, 88, said dissolving parliament is the option of last resort, Ansa reported, citing the president in Naples.

Lawmakers from People of Liberty, or PDL, will be Letta’s main target.

“In the end it’s all up to the PDL,” Letta said late yesterday in an interview televised on state-broadcaster RAI. “I think there’s a deep debate taking place within the PDL.”

Market Safeguards

Italy and other sovereign issuers that suffered during the debt crisis are pressing the European Union to bolster safeguards against market speculation. While European Central Bank President Mario Draghi provided relief by promising last year to protect the euro, EU initiatives like a planned banking union have been bogged down by negotiations among the member states.

Berlusconi’s call to exit the government was heeded by Deputy Prime Minister Angelino Alfano, who said Sept. 28 that all five ministers from the PDL were stepping down. Health Minister Beatrice Lorenzin confirmed her decision to quit in a statement, while Constitutional Reforms Minister Gaetano Quagliariello said on RAI News24 that he intended to deliver his resignation.

Fragmented Parliament

The survival of Letta’s premiership depends on his ability to forge unity from a fragmented Italian parliament for a second time this year. Letta ended nearly two months of gridlock in April by convincing his Democratic Party, the biggest force in parliament, to embrace an alliance with the PDL. He may be forced to focus on PDL defectors as Beppe Grillo’s Five Star Movement, the biggest opposition party, has refused to ally itself with other parties.

“A return to the polls in the short run is not a foregone conclusion,” Wolfango Piccoli, an analyst at Teneo Intelligence in London, said yesterday in a research report. “The situation is very fluid and prone to further surprises, especially as the next crucial phase will take place in parliament.”

Political turmoil has plagued Italy, the world’s third-biggest debtor after the U.S. and Japan, throughout the euro financial crisis. Berlusconi, forced out as prime minister in 2011, brought down his successor, Mario Monti, in December 2012. Parliament, elected in February, has been incapable of enacting an economic program to pull Italy from its two-year recession.

Continued Weakness

Italy, whose economy has contracted since the third quarter of 2011, showed signs of continued weakness as industrial production unexpectedly fell in July. Unemployment reached 12 percent and deteriorating results at Telecom Italia SpA (TIT) and Alitalia SpA have left those companies susceptible to takeovers by non-Italian buyers.

Adding to the turmoil in Italy’s establishment, Intesa Sanpaolo SpA, the country’s second-biggest bank, said yesterday that its chief executive officer resigned after a slump in earnings. Milan-based Telecom Italia SpA Chief Executive Officer Franco Bernabe also plans to tender his resignation this week after losing the support of the carrier’s biggest shareholders, a person with knowledge of the matter said last week.

Back in Rome, Berlusconi, now a senator, may be ousted from parliament as soon as next month because his criminal conviction for tax fraud was rendered definitive by a Supreme Court ruling Aug. 1.

He is scheduled to present his defense in an Oct. 4 meeting of the Senate’s parliamentary immunities committee. If the panel recommends his expulsion, his fate will be decided in a vote by the full chamber. The Democratic Party has said his removal is required by a 2012 anti-corruption law.

(Source: Bloomberg)