By Barry Moody
ROME (Reuters) - He is on trial for having sex with an underage prostitute, is one of the most divisive figures in Italy and was chased from office eight months ago after steering his country to the brink of financial catastrophe.
Now Silvio Berlusconi - who denies the sex trial charges - is back, unchastened, and apparently planning to stand for prime minister in an election early next year.
His move has added a new element of instability into Italy's volatile politics, one of the key factors cited by ratings agency Moody's in downgrading the country's sovereign debt by two notches last week and warning it could cut further.
It underlines the lack of credible figures to continue the work of technocrat Prime Minister Mario Monti, who has repeatedly said he will not stand at the election after restoring Italy's credibility and imposing tough debt-cutting policies when he replaced Berlusconi last November.
If that reform drive withers, the consequences would spread far beyond Italian shores. The euro zone's third largest economy, with debts amounting to some two trillion euros, is widely viewed as too big to bail out.
The idea of Berlusconi, one of Italy's richest men, re-emerging has caused horror in many quarters, at home and abroad. Center-left leader Pier Luigi Bersani spoke for many when he called it "appalling".
Yet, as ever, the 75-year-old media magnate's move has generated global media fascination, reflecting not just his powerful personal need to be center stage, but the weaknesses of Italy's political system.
"Monti is doing a great job, but who is going to implement all this stuff? The implementation risk is enormous, especially if you look at Berlusconi," said Erik Jones, Director of European Studies at Bologna's Johns Hopkins University.
Moody's was similarly pointed in its assessment, saying: "The negative outlook reflects our view that risks to implementing these reforms remain substantial."
Monti is reported to have reacted to the agency's decision by saying: "We are virtuous but instead of rewarding, they punish us." His ministers are scathing about the expertise of Moody's, whose downgrade was shrugged off by markets last week.
The technocrat premier's frustration is understandable in the light of his battle since replacing Berlusconi to pull Italy back from the brink of a Greek-style crisis and re-establish its international and financial credentials.
Monti is highly respected in Brussels, Berlin and Washington. His serious and courtly style and economic expertise is as far removed as imaginable from Berlusconi, who is famed for his diplomatic gaffes, sex and corruption scandals - he faces a total of four trials - and off color jokes.
A lot of hopes are pinned on him. If shut out by the bond market, Italy could prove the tipping point for the entire currency project.
HOSTAGE TO POLITICS
But, for all his strengths Monti is hostage as an unelected premier to the murky and discredited world of Italian politics whose players have gradually undermined his efforts, together with external factors like the slow pace of euro zone policymakers and the contagion risk from Greece and Spain.
"He has all the other kinds of legitimacy you could possibly imagine. He is smart, he is well respected, he is competent, but without the popular mandate it is difficult to throw your weight around," Jones told Reuters.
Monti was appointed by President Giorgio Napolitano in November, with broad support from a grand coalition stretching from center right to center left.
Initially, in an atmosphere of emergency, the parties were too frightened by the threat of meltdown to oppose painful cost cutting and tax increases.
Since then however, as he switched from austerity to reforms aimed at stimulating growth and as his popularity declined sharply because of the pain of recession worsened by his early measures, Monti's path has been increasingly uphill.
A senior figure in the government, who asked not to be named, said Monti had "front loaded" his reforms in anticipation of these difficulties in the final months of his mandate.
Nonetheless, if they stall or worse, are unpicked, investors will take a dim view with potentially dire consequences.
The unnatural alliance between Berlusconi's center-right PDL party, the center-left Democratic Party (PD) and the centrist UDC which supports Monti in parliament, has become increasingly fractious, exposing its basic incompatibility.
As a consequence Monti's reforms, from modernization of the labor market to liberalizing closed trades and professions, have been diluted by competing interest groups in parliament.
At the same time, the pain of the economic crisis has aggravated public anger about the shortcomings of Italian politicians, encouraging the spectacular emergence of caustic comedian Beppe Grillo's populist Five Star movement.
And external factors, with Italy twinned with Spain at the center of market concern about the euro zone crisis, have brought Italy's borrowing levels back to the danger point which justified Monti's appointment in the first place, reducing his room for maneuver in imposing bitter medicine on the public.
What seems astonishing is that Italy's parties, long aware that the financial crisis, public discontent and the contrast between the esteem for Monti and contempt for traditional politicians have all undermined their credibility, have so far failed to present new faces to win votes next spring.
Some of them seem to have been holding out hope that they could somehow present an alliance that would benefit from Monti's prestige despite his refusal to remain as premier.
"They all secretly have this dream where Monti becomes a part of their political movement. They have been waiting for this consummation that is not going to take place," Jones said.
Some analysts believe there is still a chance of parties trying to campaign behind the idea of a government that includes one or several of Monti's cabinet with Industry Minister Corrado Passera frequently mentioned as a figurehead.
Franco Pavoncello, Political Science professor at John Cabot University in Rome, pours cold water on Berlusconi's chances of a return and believes a centrist alliance headed by someone like Passera would win a lot of votes. "If there is an electoral group representing the continuation with Monti, I don't think Berlusconi would have much of a chance," he told Reuters.
Nevertheless, it might be mistaken to count Berlusconi out altogether and his recent statement that it would not be taboo for Italy to leave the euro has added to market jitters.
"A close observer and excellent interpreter of swings in public opinion, Berlusconi seems to have picked up on the increased sense of frustration with Italian society that the sacrifices being made by the country are not being sufficiently recognized by the markets," BNP Paribas said in a research note.
Berlusconi is typically keeping people guessing about his intentions, despite statements by close aides that he will stand for premier next year. However, he appears to be getting ready, jogging to lose weight and holding a forum with international economists near Milan this week as he returns to center stage.
Berlusconi seems to be motivated at least partly by a sharp decline in the fortunes of the PDL since he stepped down as prime minister. It is now vying with Grillo's movement for second place behind the center left led by Bersani's PD.
His private polls are said to show that with his protege Angelino Alfano remaining as PDL secretary, the party would poll less than 12 percent in an election while it would win 28 percent with him as leader.
But the result of Berlusconi's entry, encouraged by a close group of sycophantic advisers, could have the opposite effect despite his undoubted campaigning skills.
The party is already badly split over the idea, which at a stroke has undone Alfano's attempts to build a broad centrist alliance with Pier Ferdinando Casini's UDC, pushing the latter into the arms of the center-left Democratic Party.
Casini on Wednesday described the prospect of a Berlusconi return as "horrifying".
The center-left would win an election easily now according to opinion polls although it is itself far from united with Bersani under a mounting challenge from Florence's young mayor Matteo Renzi and splits between the PD's right and left wings.
There are suspicions that Berlusconi's real motives are to protect his financial interests, including maintaining strong influence over state broadcaster RAI and preventing legal changes that would worsen his judicial woes.
He may be content with creating a smaller party which would have enough parliamentary power to achieve these aims.
Whatever the outcome, Italy and Monti's government look like they will face a turbulent few months before next year's elections.
What will happen after that is anybody's guess.
(Editing by Mike Peacock)
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