World

Italy's Fanciful Coalition Draft Draws Investors' Incredulity-For Now

Italy's Fanciful Coalition Draft Draws Investors' Incredulity-For Now

Italy's two anti-establishment parties agreed the basis for a governing accord on Thursday that would slash taxes, ramp up welfare spending, and pose the largest challenge to the European Union since the United Kingdom voted to leave the bloc two years ago.

The League and 5-Star have failed to agree on forming a coalition between themselves after an inconclusive election on March 4, but they have enough votes together in parliament to block any other government from taking office.

Yet the market's reaction was remarkably muted.

"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 programme 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. Prime Minister Silvio Berlusconi was toppled in 2011 as a former European Union commissioner and economics professor Mario Monti was installed as his "technocratic" replacement after the Union decided the country had not been run to their satisfaction.

"From Europe we have the umpteenth unacceptable interference by unelected officials", League leader Matteo Salvini said on Tuesday.

A version of the document, from Tuesday evening, was leaked to daily Il Fatto Quotidiano. In it, the parties said they planned to ask the ECB to forgive 250 billion euros ($296 billion) of Italian debt purchased under the euro zone central bank's quantitative easing (QE) program.

The pan-European FTSEurofirst 300 stock index rose 0.62 percent, while Italy's benchmark index bounced 0.3 percent following heavy losses on Wednesday on concerns that a new government could relax fiscal discipline.

The two policies were, respectively, the key campaign promises for the League and M5S. They have both vowed to scrap an unpopular pension reform - a move that would punch a 15-billion-euro hole in state coffers.

Italy's debt mountain totals more than 130 percent of national output is the highest in the eurozone after Greece. "I am really happy", M5S leader Luigi Di Maio writes on the party's website.

More news: Meghan Markle's sadness over father's wedding absence
More news: Kristen Stewart Just Broke All The Red Carpet Rules At Cannes
More news: Regional stores at risk as Mothercare seeks CVA approval

"Italy is of maximum importance for the European Union, which would not be complete without the Italian nation and its people", Juncker told reporters here.

Losses in Asian share markets, however, were limited after US equities advanced on Wednesday, led by retail and technology shares, even as a rise in USA 10-year Treasury yields to an nearly seven-year high suggested more competition for equities.

"With the M5S/LN government, the underlying problems of the Italian economy, including low growth, inflexible labor markets, inefficient banking system and public administration will not be tackled, in many cases only worsened", Nordea Chief Strategist Jan von Gerich said in a note to clients. He declined to comment on the outcome of the coalition talks.

The "contract" will also be put to a vote by League members.

Both parties have a history of Euroscepticism.

Moments earlier, a 5-Star source had said the programme had been substantially agreed and that it contained no reference to a possible exit from the euro or "anything that could cause any concern regarding Italy's euro membership".

It is still far from clear whether Five Star and the League are prepared to go all the way - and in fact the bluster on the euro may simply be the product of a political compromise in their negotiations that will never translate into policy.

"Underneath the surface, the question of what will be the relationship between the new government and the European Union is really the fundamental one", former Italian Prime Minister Mario Monti said in a Bloomberg Television interview.

Francesco Galietti, head of the Policy Sonar political risk consultancy, described the nascent coalition's economic policies as "a pretty spicy dish", but he said investors were pleased to see that Italy was managing to form a government.