By Giuseppe Fonte and Gavin Jones
ROME (Reuters) - Proposals to reform the euro zone's bailout fund are creating a political storm in Italy, where parties and institutions are battling over whether Rome should try to block the reform at the EU level.
A draft of the reform was agreed by euro zone finance ministers in June and is due to be finalised by leaders next month, but senior Italian officials, including its central bank chief, have warned some measures are financially dangerous.
In particular, they are against proposals that would make it easier to restructure euro zone sovereign bonds in the event of a financial crisis.
This would involve turning the bailout fund, known as the European Stability Mechanism (ESM), into a sort of European Monetary Fund that would make support for countries in financial crisis conditional on them restructuring their debt.
The ESM threatens to be yet another source of tension in Prime Minister Giuseppe Conte's government, which is already divided over issues such as taxation policy, justice reform and immigrant rights.
Conte is not resigned to signing off on the draft, and is working on amendments to propose to its EU partners, a government source told Reuters on Monday.
But the main opposition party, the hard-right League, says the government is trying to sign off on it secretly and has demanded that Conte addresses parliament.
"Approving the ESM changes would mean ruin for millions of Italians and the end of our national sovereignty," League leader Matteo Salvini said on Tuesday in a tweet.
Conte accused the League of hypocrisy, pointing out that the draft of the reform was negotiated while the League was in power in a previous coalition that collapsed in August.
It is not only the political opposition that is concerned over the reform.
Bank of Italy Governor Ignazio Visco said last week that introducing a debt restructuring mechanism carried a "huge risk" and could "trigger a perverse spiral of expectations of default, which may prove to be self-fulfilling".
Prominent economists, including Carlo Cottarelli, a former International Monetary Fund and Italian government official, have expressed similar concerns, and the issue now also threatens to divide the government.
Economy Minister Roberto Gualtieri, from the center-left Democratic Party (PD), said in a television interview on Monday the reform carried no reasons for concern and described the political furor as "a storm in a teacup".
However, lawmakers in the anti-establishment 5-Star Movement, the PD's coalition partner, disagreed.
5-Star's members of the Chamber of Deputies Finance committee said on Tuesday the reform talks had taken a dangerous turn for Italy and asked for a meeting of the ruling coalition.
"We are not in agreement with the reform of the ESM," they said in a statement.
Gualtieri said on Tuesday he would answer questions on the matter in testimony to the Senate finance commission on Nov. 27.