ROME (Reuters) - Former Prime Minister Matteo Renzi insisted on Tuesday that Italy should apply for a loan from the euro zone’s bailout fund and warned current premier Giuseppe Conte he was ready to sink his government if he refused to do so. Renzi has been threatening for months to withdraw the two ministers from his tiny Italia Viva party from the cabinet, unleashing political chaos on Italy as it struggles to contain the COVID-19 pandemic. Renzi’s complaints had focused on Conte’s plans for spending billions of euros promised by the European Union to relaunch Italy’s battered economy, and the showdown was expected at a Tuesday cabinet meeting to approve the so-called Recovery Plan. However, speaking in an interview with state television on Tuesday as the meeting was ongoing, he said the Recovery Plan had improved thanks to his party’s pressure and turned his sights on the issue of a loan from the EU’s bailout fund. The bailout fund, known as the European Stability Mechanism (ESM), offers up to 36 billion euros in cheap loans for countries to bolster their health systems. “We have made some steps forwards but something is missing, and that is called the ESM,” Renzi said. However, with free grants available from the EU’s Recovery Fund, no country has shown any interest in taking an ESM loan, wary of pushing up their national debts and the market stigma that could be linked to taking money from a bailout fund. The largest coalition party, the anti-establishment 5-Star Movement, is strongly hostile to the idea, and Conte has so far backed its position. RISING BOND YIELDS Market reaction to the crisis has so far been muted, thanks largely to the European Central Bank’s large-scale purchases of Italian assets. However, Italian bond yields climbed 10 basis points on Tuesday ahead of the cabinet meeting, the biggest daily rise since early November. Keeping Italy on tenterhooks over his next move, Renzi said he and his ministers would hold a news conference on Wednesday, after the cabinet has approved the Recovery Fund. At 11:40 pm (22:40 GMT) the cabinet meeting was still ongoing. Italy Viva, a centrist party, has under 3% of the vote but its backing in parliament is crucial to the survival of the coalition led by 5-Star and the centre-left Democratic Party. Renzi laid the blame for the crisis at the hands of Conte, saying he was already trying to lure opposition lawmakers into the majority to take Italia Viva’s place. “If you want us to stay in the government you must at least listen to some of our ideas,” he said, calling for more spending on infrastructures and job creation instead of income support. Italy’s 172-page Recovery Plan sets out plans for spending some 223 billion euros of European Union financing over the next six years. The final version before cabinet on Tuesday met Renzi’s demands that more should go towards the health service and education than in previous drafts. Renzi said if Conte agrees to apply for an ESM loan his party would vote for the Recovery Plan in cabinet, otherwise it would abstain. One possible scenario if Italia Viva quits would be for all the coalition parties to renegotiate a new pact, which would almost certainly open the way for a major cabinet reshuffle, with or without Conte at the helm. If the coalition cannot agree on a way forward, state president Mattarella would almost certainly try to put together a government of national unity to deal with the health emergency, which has killed almost 80,000 Italians, and knock-on economic crisis. If that failed, the only option would be a national vote.