Italian Prime Minister Matteo Renzi resigned on Wednesday after a bruising referendum loss at the weekend, with most parliamentary factions pushing for an early election in a few months' time.

The 41-year-old's decision to quit after less than three years in office dealt a new blow to Western governments still in shock from Britain's vote to leave the European Union and the election of outsider Donald Trump as U.S. president.

Underscoring the financial risks that heavily indebted Italy faces, Moody's changed its outlook on the country's bond rating to negative from stable, saying prospects for much-needed economic reform had shrunk after Italians rejected Renzi's proposals to revise the constitution and streamline parliament.

Renzi tendered his resignation to President Sergio Mattarella, who said he would consult with political parties to decide the next steps. He asked Renzi to carry on in a caretaker capacity until a solution is found.

After the consultations, which will begin on Thursday at 1700 GMT and end on Saturday afternoon, Mattarella is widely expected to ask a member of Renzi's cabinet, or a politician from his Democratic Party, to try to form a new government.

Elections are due in 2018 but many politicians are calling for them to be held earlier.

The political crisis sparked by the referendum coincides with a crisis in Italy's debt-laden banks, especially at its third-biggest lender Monte dei Paschi di Siena (BMPS.MI), which looks likely to require government intervention to survive.

Two sources told Reuters on Tuesday that Renzi's administration was preparing to take a 2-billion-euro ($2.15-billion) controlling stake in the bank by purchasing junior bonds.

On Wednesday, a Treasury spokesman denied Italy was poised to ask for a loan from the European Stability Mechanism to support its banking sector.

QUICK VOTE

Renzi addressed his Democratic Party (PD) before meeting the president, saying the party would only participate in a government intended to last until 2018 if it was backed by all the main forces in parliament, a prospect which seems remote.

Otherwise early elections should be held as soon as possible, he said, after the Constitutional Court has ruled early next year on the legitimacy of the current electoral law.

"The PD is not afraid of going to early elections," he said.

Most opposition parties, including the anti-establishment 5-Star Movement and the right-wing Northern League, are clamoring for a quick vote.

Northern League leader Matteo Salvini said on Wednesday his party would "take to the streets" if a clear indication of the timing of the next election had not been given within a week.

Infrastructure Minister Graziano Delrio, a close ally of Renzi, said an interim government should change the electoral law quickly so an election could be held "in the Spring".

Silvio Berlusconi's Forza Italia and a left-wing minority inside Renzi's PD want a new administration to be formed with the backing of the current parliament, perhaps to last until 2018, to give them time to resolve internal party battles.

Markets have reacted calmly to the political tensions, with the gap between Italian and German bond yields hitting 155 basis points on Wednesday, the tightest in about a month, having climbed as high as 193 points before Sunday's vote.

Although Moody's maintained its rating at Baa2, just two notches above junk status, it said the outlook had dimmed, with the chances of meaningful economic and fiscal reform receding.

"(There is) the rising risk that the stabilization and reduction in Italy's large debt burden will be further deferred," the ratings agency warned.

It said it might consider cutting the rating at a future date, citing as one possible trigger "the need for a significant recapitalization of banks by the government".

There was no immediate comment from the Treasury.

(Additional reporting by Isla Binnie, Crispian Balmer and Francesca Piscioneri; Editing by Philippa Fletcher and James Dalgleish)

Source:
courtesy of REUTERS

by Gavin Jones and Steve Scherer

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