Italy faced an institutional crisis today when the central bank governor spurned a demand from the prime minister to quit over a takeover scandal.
The standoff over the Bank of Italy confronted Prime Minister Silvio Berlusconi with a major challenge to his authority after his economy minister resigned having failed to drive defiant central bank chief Antonio Fazio from office.
Mr Berlusconi's problems were compounded by an open challenge to his leadership from one of his governing partners, prompting the opposition to call for a snap general election which polls show the centre-right ruling coalition would lose.
"Time's up," read the headline to a front-page editorial in the Corriere della Sera newspaper, calling on Mr Berlusconi to resign the day after Domenico Siniscalco abruptly quit as economy minister. "The resignation of Economy Minster Siniscalco has dealt the final blow to Berlusconi's government's remaining credibility."
Mr Berlusconi sought to limit the political damage by swiftly replacing Mr Siniscalco with Giulio Tremonti, who was ousted as economy minister by coalition infighting just 14 months ago.
He also finally turned his guns on Mr Fazio, telling the central banker he should step down over accusations he unfairly favoured a local bank in a cross-border takeover fight.
But Mr Fazio flew to Washington for meetings of the Group of Seven and the International Monetary Fund, ignoring the prime minister's plea.
Mr Fazio has resisted intense pressure to resign since July, when leaked police phone taps fuelled accusations he had favoured Banca Popolare Italiana in a battle with Dutch lender ABN AMRO for control of Banca Antonveneta.
The 68-year-old Mr Fazio, who has a open-ended mandate and does not report to the government, has said he did nothing wrong. In comments on a late night TV talk show on Thursday, Berlusconi, for the second time this month, said only the ECB could dismiss Fazio -- "if it believes he has broken the law".
But a senior European Central Bank official rejected the prime minister's contention that the ECB could fire Fazio. "The procedures for the dismissal of Fazio are very clear and they involve concerted action between the BOI's Superior Council, Italy's prime minister and Italy's president," the official told Reuters.
The ECB official said that if Italy wanted to remove Mr Fazio, Mr Berlusconi would have to ask the BOI's superior council to call an extraordinary meeting with Mr Fazio's dismissal on the agenda.