Italy’s 5-Star, League on verge of government deal; markets shudder

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ROME (Reuters) – Italy’s two anti-system parties on Wednesday appeared on the verge of clinching a deal to form a coalition government after 2-1/2 months of stalemate, rattling markets with radical ideas to free up billions of euros for tax cuts and welfare.

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

The far-right League and the 5-Star Movement have been discussing a common policy agenda for a week after a March 4 election ended in a hung parliament.

“It would be crazy to give up at the moment of truth,” League leader Matteo Salvini said in a live video stream on Facebook, adding that he would not be intimidated by negative reaction from financial markets or attacks from the media.

“The more they insult us, the more they threaten us, the more they blackmail us, the more desire I have to embark on this challenge,” he said.

A definitive program should be completed by the end of the day, Salvini said, adding that the two parties would update Italian President Sergio Mattarella on their attempt to build a government by Monday.

There was still no word on the thorny issue of who would be prime minister. Neither Salvini nor 5-Star leader Luigi Di Maio want the other to get the job, but they have yet to propose a mutually acceptable alternative figure.

Late on Tuesday, a draft coalition program leaked. In it, the parties said they planned to ask the European Central Bank to forgive 250 billion euros ($296 billion) of Italian debt purchased under the euro zone central bank’s quantitative easing (QE) program.

Italian bond yields and the cost of insuring Italy’s debt against default jumped on the news even after Claudio Borghi, the League’s economics chief, told Reuters the request for debt forgiveness was never in an official draft of their program.

He said the leaked version was “only some notes”, while what the parties want is for the European Union not to account for bonds bought by the ECB under QE when calculating a country’s official debt levels for the purposes of the EU Stability Pact.

The euro fell to a five-week low against the dollar, and Italy’s benchmark 10-year bond was set for its biggest one-day gain since July of last year.

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

PAYING FOR PROMISES

The ideas in the draft program underscore the great difficulties in finding the resources needed to pay for promises the two rival parties made to their voters during the campaign.

The League has pledged to introduce a flat tax rate of 15 percent, which would lower tax revenues by some 80 billion euros ($95 billion) per year, according to some estimates, while 5-Star has pledged new welfare payments for the poor costed at 17 billion euros.

They have both vowed to scrap an unpopular pension reform — a move that would punch a 15-billion-euro hole in state coffers.

Italy already has an enormous debt worth more than 130 percent of annual output, second only to Greece in the EU. The bloc’s budget rules require it to cut the debt pile aggressively under the “fiscal compact”, which both parties want scrapped.

Salvini dismissed concerns about the widening gap, or spread, between Italy’s benchmark bonds and safer German ones as a sign 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 leader Matteo Salvini speaks to the media during the second day of consultations with Italian President Sergio Mattarella at the Quirinal Palace in Rome, Italy, April 5, 2018. REUTERS/Alessandro Bianchi/File Photo

Di Maio told reporters in parliament “the recipe to lower public debt is by investments and expansionary policies”.

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

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

“Italy is of the highest importance for the European Union. The European Union would not be complete without the Italian nation,” Juncker said. He declined to comment on the outcome of the coalition talks.

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

Both groups have a history of euroscepticism. 5-Star has moderated its position considerably in the last year, rowing back on a previous plan to hold a referendum on Italy’s membership of the currency bloc. However, the League still wants to leave the euro zone as soon as politically feasible.

They also share an anti-establishment sentiment that has taken root in Italy but which has international parallels such as Britain’s vote to leave the EU and the U.S. election of President Donald Trump.

Each party plans to consult its supporters over the weekend to see if they back the nascent government pact. The policy program will probably be published on Thursday, 5-Star said.

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

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