Home / World / Italy's 5-star league just before the government agreement; Markets shudder

Italy's 5-star league just before the government agreement; Markets shudder

ROME (Reuters) – Italy's two anti-system parties on Wednesday seem close to finalizing a coalition government agreement after two and a half months stalemate and rattling markets with radical ideas to liberate billions of euros for tax cuts and welfare.

FILE PHOTO: Anti-Establishment 5-Star Movement Chief Luigi Di Maio speaks after a conversation with Italian President Sergio Mattarella at the Quirinal Palace in Rome, Italy, April 1
2, 2018. REUTERS / Max Rossi / File Photo [19659003] The right-wing extremist league and the five-star movement have discussed a common political agenda in an unexplained parliament one week after voting on 4 March.

"It would be crazy to give up on the truth for the moment," League chief Matteo Salvini said in a live stream on Facebook, adding that he would not be intimidated by negative financial market reactions or media attacks.

"The more they insult us, the more they threaten us, the more they blackmail us, the more need I have for this challenge," he said.

A final program should be completed by the end of the day, Salvini said, adding that the two parties would keep Italian President Sergio Mattarella informed of their attempt to form a government until Monday.

There was still no word on the thorny question of who would be the Prime Minister. Neither Salvini nor five-star leader Luigi Di Maio want the other to get the job, but they still have to propose a mutually acceptable alternative figure.

Late Tuesday a draft coalition program was released. In it, the parties said they intend to ask the European Central Bank to waive € 250 billion ($ 296 billion) of Italian debt, which was purchased under the Eurozone Central Bank's QE program.

Italian bond yields and the cost of insuring Italian debts over insolvency jumped in the news, even after Claudio Borghi, the league's chief executive, told Reuters that the request for debt forgiveness was never in an official draft of their program contain.

He said the leaked version is "just a few comments", while the parties want the European Union not to consider the bonds bought by the ECB under QE when calculating the official debt levels of a country for the purposes of EU stability Pact.

The euro fell to a 5-week low against the dollar, and Italy's 10-year benchmark bond was set at its biggest daily gain since July last year.

FILE PHOTO: Anti-establishment 5-Star Movement Leader Luigi Di Maio speaks after a conversation with Italian President Sergio Mattarella at the Quirinal Palace in Rome, Italy, April 12, 2018. REUTERS / Max Rossi / File Photo


The ideas in the draft program highlight the great difficulty of finding the resources needed to pay for the promises made by the two rival parties to their constituents during the campaign.

The League has committed to introduce a flat-rate tax rate of 15 percent, which would, according to some estimates, reduce tax revenues by about 80 billion euros ($ 95 billion) a year, while 5-star new social benefits for the poor cost 17 billion Euro.

Both have vowed to scrap an unpopular pension reform – a move that would hit a € 15 billion hole in the treasury.

Italy already has an enormous debt of more than 130 percent of its annual production, second only to Greece in the EU. The bloc's budget rules demand that the debt stack be aggressively cut under the "fiscal pact" that both parties seek to scrap.

Salvini dismissed concerns over the growing gap between Italian benchmark bonds and safer German bonds as the two potential partners were on the right track. The spread is a "cynical board game of high finance," he said.

FILE PHOTO: League Party Secretary Matteo Salvini speaks on the second day of consultations with Italian President Sergio Mattarella in the Quirinal Palace in Rome, Italy, on April 5, 2018. REUTERS / Alessandro Bianchi / Archiv photo

Di Maio told reporters in parliament "The recipe for reducing public debt is through investment and expansionary policies".

The EU leaders meeting in Sofia on Wednesday are likely to be affected by the rhetoric of the parties, which could form a new Italian government next week.

In Brussels, European Commission President Jean-Claude Juncker said the EU would not be complete without Italy if asked at a press conference about Italy's role in the EU and its reliability in respecting common rules.

"Italy is of paramount importance to the European Union, and the European Union would not be complete without the Italian nation," Juncker said. He declined to comment on the results of the coalition talks.

President Sergio Mattarella, who has repeatedly stressed the importance of maintaining a strong pro-European stance, could also be dismayed.

Both groups have a history of Euroscepticism. 5-Star has significantly softened its position over the last year by agreeing on a previous plan to hold a referendum on Italy's membership of the currency bloc. Nevertheless, the league wants to leave the eurozone as soon as possible.

They also share an anti-establishment sentiment that has gained a foothold in Italy but has international parallels, such as Britain's choice to leave the EU, and the US election of President Donald Trump.

Each party plans to consult with its supporters over the weekend to see if they support the emerging government pact. The program is expected to be released on Thursday, said 5-Star.

Additional reporting by Balazs Koranyi in Frankfurt, Francesco Guarascio in Brussels, adaptation by Catherine Evans, William Maclean

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