Italy's government close to collapse ahead of Matteo Renzi's news conference

Italy's government was hanging by a thread on Wednesday ahead of a news conference by former Prime Minister Matteo Renzi who has threatened to pull his tiny centrist party out of the ruling coalition, triggering its collapse.

Renzi will speak at 5:30 pm (1630 GMT) with his Italia Viva party's two ministers. He has not revealed the reason for the news conference but many observers believe the ministers will announce their resignations.

Such a move would unleash political chaos on Italy as it struggles to contain the resurgent Covid-19 pandemic. Italia Viva's backing in parliament is crucial to the survival of the coalition led by the anti-establishment 5-Star Movement and the centre-left Democratic Party (PD).

On Wednesday 5-Star and the PD reiterated their appeals to Renzi to preserve the unity of the government.

"I am not giving up, the PD is not giving up, (PD leader Nicola) Zingaretti is not giving up, we have to do all we can to save this coalition," PD Senate leader Andrea Marcucci, who is considered close to Renzi, said in a television interview.

Renzi's Italia Viva party, which has voter support of under 3%, has been an unruly ally for Prime Minister Giuseppe Conte ever since his government was formed in 2019, and tensions have increased steadily over recent weeks.

Renzi's complaints originally focused on Conte's plans for spending billions of euros promised by the European Union to relaunch Italy's battered economy.

Pressure on Conte

Italy's draft "Recovery Plan" offered too little for the health service, culture, and infrastructure projects, Renzi said, and it was to be overseen by a group of unelected experts which he argued was an insult to parliament.

The plan was finally approved by cabinet late on Tuesday and Renzi said in a television interview that the final version was "a step forward" and had addressed several of his demands.

However, keeping the pressure on Conte, he raised other policy grievances and insisted Italy should apply for a loan from the euro zone's bailout fund, known as the European Stability Mechanism (ESM) to help its health service.

The 5-Star Movement, the largest ruling party, is strongly hostile to this idea and Conte has so far backed its position.

With free grants available from the EU's Recovery Fund, no country has shown any interest in taking an ESM loan, wary of pushing up their national debts and the market stigma that could be linked to taking money from a bailout fund.

Conte and 5-Star said on Tuesday that if Italia Viva withdraws its ministers a new pact with Renzi's party would be impossible, apparently ruling out the widely-touted option of a large-scale government reshuffle with the same majority.

Market reaction to the crisis has so far been muted, thanks largely to the European Central Bank's large-scale purchases of Italian assets. However, Italian bond yields climbed 10 basis points on Tuesday, the biggest daily rise since early November. They were little changed on Wednesday ahead of Renzi's news conference.