Premier Romano Prodi on Monday suffered another setback in a row centring on Telecom Italia, with the loss of a close advisor who had recommended that the state buy back part of the debt-laden telecommunications giant.
Angelo Rovati quit as economic and political advisor to the centre-left premier saying his report on Telecom had been "distorted" and used to "damage Prodi and his government".
His resignation came three days after Telecom's controlling shareholder, Marco Tronchetti Provera, abruptly stepped down as the group's chairman.
Tronchetti Provera resigned at a Friday night board meeting following a bitter clash with Prodi over an unexpected U-turn in company strategy.
Prodi has bowed to pressure for a parliamentary debate on the affair amid heated opposition charges that he is interfering in the running of Telecom, Europe's fifth largest telecoms group, and even seeking to renationalise it.
Guido Rossi, a respected troubleshooter and corporate lawyer who oversaw Telecom's privatisation in 1997 under Prodi's first government, has replaced Tronchetti Provera.
Investors appeared to approve the move on Monday with Telecom shares rising 1.66% to 2.23 euros in morning trading.
The market seemed to be responding to indications from Rossi that he would follow through with Tronchetti Provera's radical new strategy of splitting Telecom into three, with the creation of stand-alone companies for its fixed line, mobile and broadband/media activities.
The policy reversal comes little more than a year after Tronchetti Provera merged Telecom with its mobile arm TIM.
Analysts immediately speculated that Tronchetti Provera was preparing ground for a TIM sell-off in order to reduce Telecom's debt mountain of 41.3 billion euros, a sum which
almost equals the group's estimated market value.
Several ministers said they feared TIM would end up in foreign hands, like Italy's other mobile phone operators, and called on the government to block the restructuring plan.
Leftist allies in Prodi's nine-party governing coalition went further, saying that Telecom should be renationalised.
Prodi himself expressed surprise and alarm, saying he knew nothing of the new strategy and that Tronchetti Provera had failed to inform him of his plans during two recent meetings.
The premier went on to reveal that Tronchetti Provera had discussed with him potential deals with News Corporation, Time Warner and General Electric but had made no mention of
the TIM spin-off.
Prodi was immedatiately accused of divulging market-sensitive news.
With press publication of a leaked copy of Rovati's report last Wednesday, the premier was also accused of knowing far more about Telecom's plans than he had let on.
The report, sent to Tronchetti Provera by Rovati in early September, offers several restructuring options to help solve Telecom's debt problems. One of them is that Telecom split itself from TIM and that the Treasury's savings and loans division then buy control of the fixed-line entity.
Rovati said the operation would reduce Telecom's debt by 17-20 billion euros and that the state's investment would be offset by 5-7 billion euros from the capital gains on Telecom plus 120-170 million euros per year in profits.
Rovati repeated on Monday that Prodi and the government had nothing to do with the 28-page analysis, even though it was printed on letter-headed paper from the premier's office.
Speaking from China where Prodi is wrapping up a six-day visit, Rovati said the report had been drawn up confidentially for Tronchetti Provera, whom he accused of betraying his trust.
He said his hoped his resignation would help "clear the poisonous atmosphere".
OPPOSITION BLASTS PRODI, RESIGNATION CALLS
The opposition said on Monday that Rovati's resignation was insufficient and that Prodi himself should step down after the parliamentary debate on Telecom.
Opposition chief Silvio Berlusconi, who narrowly lost to Prodi in the April general election, said on Sunday that "what's happening here is something truly serious, which in any other Western democracy would have led to the head of government's resignation".
Berlusconi's Forza Italia party also demanded a parliamentary investigation into the case and that Prodi appear personally before parliament on the matter rather than sending ministers as planned.
Forza Italia Senate Whip Renato Schifani said that "Prodi can't get away with this... There are too many things he's pretending not to know".
The row also exposed divisions in the governing coalition.
While leftists such as the Italian Communists' Party (PDCI) openly admitted they wanted the state to "re-enter some strategic sectors of the economy", the Radical party expressed horror at the notion of greater state control.
Industrial employers' federation Confindustria also said it feared creeping renationalisation, adding that the idea alone was damaging to the country's international credibility.
Meanwhile, prosecutors in Rome announced that they had opened a probe into whether Telecom had followed correct procedures with bourse watchdog Consob.
They stressed that no-one was under investigation as yet.
