Italy's populists brush off European Union concerns about possible gov't

Italy's 5 Star chief says policy agenda with League almost completed

Italy's anti-establishment Five Star Movement (M5S) and its far-right partner, the League, appeared to be on the verge of signing a government deal on Thursday after overcoming outstanding divisive issues.

Silvio Berlusconi, 81, was eclipsed as leader of the centre-right by the more hard-line League.

In calculating debt as a proportion of gross domestic product - Italy's ratio of more than 130 percent is second only to Greece in Europe - the draft accord proposes discounting hundreds of billion euros in Italian debt purchased by the European Central Bank under the bank's quantitative easing (QE) programme.

The parties still haven't said who they'll nominate as prime minister.

The report spooked markets, even though the League's economic spokesman told Reuters that debt cancellation was never in an official draft of a government program.

League leader Matteo Salvini said on Wednesday said he was not intimidated by a rise in bond yields.

Italy's 10-year bond yield jumped 14 basis points to 2.08 percent, IT10YT=RR its highest level since early March.


This will now be something to watch as populism is back on the agenda for markets where the coalition has radical ideas to free up billions of euros for tax cuts and welfare.

As Italy's sovereign debt has reached 130% debt-to-GDP ratio, the incoming the anti-establishment parties are set on introducing a universal basic income of €780/month at an estimated annual cost of €17 billion and trimming the overall tax burden by slashing VAT and introducing a flat corporate tax, while all the while calling for European Union matching funds. Italy's main share index closed up 0.3% and the gap between the yields on Italy's benchmark bonds and safer German bonds retreated after briefly widening on Thursday to their widest since early January.

It proposes that European Union sanctions against Russian Federation be dropped immediately, and includes a watered-down EU section that no longer talks about exiting the single currency but asks that unspecified "certain responsibilities" be repatriated to individual member states. "But I won't comment in advance on the possible outcome of talks taking place on a coalition government", he said.

5-Star deputy Alfonso Bonafede also said the policy document was completed. 5-Star has moderated its position over the past year, but the League still wants to leave the eurozone as soon as politically feasible.

The head of state has made it clear that he will only look at the definitive version of the text, after a draft leaked earlier this week caused consternation with proposals that would allow Italy to leave the euro, demand financial concessions from the European Union and withdraw sanctions on Russian Federation.

The "contract" also calls for "appropriate recourse to deficit spending" to force the economy to expand, and suggests that sovereign bonds held by the European Central Bank (ECB) should be "excluded from debt-to-GDP calculations" for all EU member states. Each party plans to consult its supporters over the weekend to see if they back the nascent government pact.

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