Italy's 5-Star, League on Verge of Government Deal; Markets Shudder

Matteo Salvini

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

Both leaders said the final policy document would be put to their voters before being submitted to the president, Sergio Mattarella, who has the final say on the contract, prime minister and cabinet lineup.

LONDON/MILAN, May 16 (Reuters) - Italy's borrowing costs jumped on Wednesday and its stocks slid after a draft programme for a potential coalition government revealed plans to demand 250 billion euros of debt forgiveness and create procedures to allow countries to exit the euro.

Italy's two anti-system parties appeared on the verge of clinching a deal to form a coalition government, rattling markets with radical ideas to free up billions of euros for tax cuts and welfare.

The anti-establishment 5-Star movement and the far-right Northern League could have enough support for a majority after Sunday's (4 March) general election, although some analysts believe such a coalition is unlikely.

And while Di Maio wants to introduce a national minimum income, Salvini is pushing for a flat tax to reduce middle class's taxation.

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.

Yields on benchmark USA bonds rose on Thursday to their highest level in about seven years, pushing the US dollar to a four-month peak against the yen, while oil prices eclipsed $80 a barrel for the first time since November 2014. "The next few days will be crucial", Luigi Di Maio told reporters after meeting with Mr. Mattarella.

Luigi Di Maio
GETTYFive Star leader Luigi Di Maio claims a coalition deal is close

"The spread is going up - do you remember the spread?" he said in a live.

According to Italian media reports, their nominee for Prime Minister is likely be from a "third party" and will have to be able to make the eurosceptic nature of the new government workable with Brussels.

Hours after the document leak, 5-Star and the League issued a further joint statement saying they wanted to "reconsider" the euro zone's fiscal rules with Italy's partners "in the spirit of returning to the pre-Maastricht set-up" - a reference to the treaty which laid the groundwork for monetary union.

"We'll need to cope together with the European challenges as we do with other EU leaders, not all of them are flawless", one of the EU officials said.

It is likely to cause concern in Brussels and at European Central Bank headquarters in Frankfurt and might also dismay Italian President Sergio Mattarella, who has emphasised the importance of the country maintaining a strong, pro-European stance.

It could lead to a spate of Eurosceptic, populist parties making promises to clear European Union debt. 5-Star has moderated its position considerably in the a year ago, rowing back on a previous plan to hold a referendum on Italy's membership of the currency bloc.

"We will see what the outcome is and then we will comment", Juncker stated.

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. The policy programme will probably be published on Thursday, 5-Star said.

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