Berlusconi 'party showdown' seen as doves and hawks collide

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The political future of Silvio Berlusconi is on the line – again. In the never-ending soap opera that is Berlusconi's career, his "People of Liberty" (PdL) party are to hold their national convention this weekend but rifts within the ranks could threaten the former Prime Minister's political legacy.

Ostensibly, the convention has been called to ratify a decision to re-launch the party under its former name "Forza Italia", but Italian media predict that political tensions over the party's role in the country's coalition government could cause a massive party split this weekend.

Tensions have been simmering within the coalition government led by Prime Minister Enrico Letta, the head of the center-left Democratic Party (PD) and its center right PdL partners led by Berlusconi -- a three-time former premier himself -- since the government's awkward inception in April.

Italian newspapers are now forecasting that the convention will be a "party showdown" between 77-year old party leader Berlusconi and his rebellious party secretary, Angelino Alfano, who backed Letta in a confidence vote called by his party leader in October.

(Read more: Letta wins confidence vote as Berlusconi backs down)

"Berlusconi's PdL is in danger of dividing between pro-government doves like Alfano and Berlusconi loyalists," the Italian newspaper Gazzetta del Sud reported on Thursday. "The split may take place at Saturday's national assembly of the PdL," the Gazzetta reported on Thursday.

The meeting was initially planned to be held on December 8 but was rescheduled for this weekend to come ahead of the crucial Senate vote on whether to expel the three-time former premier Berlusconi from parliament on 27 November, for a tax fraud conviction he received in August.

Traitors and Loyalists

Faced with the prospect of losing their charismatic leader, senior PdL members under Berlusconi's command threatened to resign and bring down the coalition government in September, a move which prompted a vote of confidence in the country's leader Letta.

Encouraged by the PdL's party secretary Alfano (who is also Letta's deputy prime minister), however, the majority of PdL members stopped short of voting Letta out.

The narrow avoidance of more political turmoil helped shore up confidence among investors that reforms vital to getting the third largest euro zone economy back on track were still possible.

Politically, however, the vote was a humiliating defeat for Berlusconi and a strong sign that his party might be ready not only to defy him, but to rid itself of a its beleaguered leader and rally behind Alfano – who was branded a "traditore" - a traitor - by Berlusconi following the vote.

(Read more: Letta wins confidence vote as Berlusconi backs down)

Lucio Malan, a loyalist senator within the PdL, told CNBC on Friday that the government was trying to "go around the law" to get rid of Berlusconi – who says he is the victim of political "persecution" by a biased, left-wing judiciary.

"There is indeed a risk of a split but a little split…I see no reason for us to have unconditional support for a government which is increasing [home owner] taxes –the opposite of what they had promised – and one that is finding any tricks and any ways to go around the law to put Berlusconi out of parliament," he said.

Judiciary action against Berlusconi is a 'scandal': PDL Senator

Berlusconi has said several times that it would be unthinkable for his party to cooperate with the PD if it commits "political homicide" by stripping him of his parliamentary seat. PdL moderates like Alfano, however, are reluctant to unleash more political uncertainty on Italy and have tried to placate Berlusconi's anti-government stance.

As a result, Berlusconi feels that his political foes – within his own ranks and in the Senate -- are closing in. On Friday, Il Giornale newspaper (which is owned by the brother of media magnate Berlusconi) had on its front page a headline of Berlusconi declaring "They say they want to negotiate but they've dug me a grave." Fellow newspaper Il Corriere della Sera, meanwhile, reported Berlusconi as saying yesterday "If I had a passport, I would disappear to Antigua."

(Read more: Silvio Berlusconi's 'Greatest' Hits)

The convention is, nonetheless, a chance for Berlusconi to win back support, according to one analyst. Wolfango Piccoli, managing director of research house Teneo Intelligence, said in a recent note that it gave Berlusconi the opportunity to stage a show of force within his party ahead of the crucial Senate vote.

"The designated recipients of Berlusconi's message are potential defectors and 'doves' within his own PDL, who are supportive of Prime Minister Enrico Letta's government," he said ahead of the convention. "Yet, it is crucial to keep in mind that Berlusconi is currently not in the position to force a collapse of the government. Prime Minister Letta can rely on the backing of the senate thanks to the defectors from PDL/Forza Italia, while Berlusconi would not yet be ready to face snap polls given that the process of restructuring his party organisation is still underway."

Economy limps on

In the meantime, Italy is a country entering its third year of recession and struggling under its warring coalition to implement reforms. In a further challenge, between the convention and the Senate vote, the government is meant to vote on the 2014 budget on 22 November.

"This dense schedule highlights that while a collapse of the government remains off the cards for now, persistent political turbulence will continue to bind resources. In consequence, little will be done politically: In the 230 days since the government came into office, forged after a two month political impasse, parliament has approved no more than 25 laws," Piccoli noted.

(Read more: Italy faces new elections and economic turmoil, analysts warn)

There are signs that the next installment of Italy's political drama could further test the patience of investors, however, who have so far turned a blind eye to Italy's political dramas keeping borrowing costs reasonably low.

"The government bond yields have come down but if you look at what's going on in the corporates we've had a downgrade to Telecom Italia today, we've had other utilities junked and some of the Italian banks and their subordinated debt junked," Bryn Jones, head of Fixed Income at Rathbones, told CNBC on Friday. "My point would be that if they spent more time focusing on their economy and business than on all the political infighting and shenanigans that go on they might be able to strengthen the economy more," he said.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

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