Italy's 5-Star, League on verge of govt deal


The emerging M5S-Lega coalition government is also demanding a revision of the Dublin rules that call for migrants to apply for asylum in the country of entry, while that await a decision on a possible resettlement.

The program, posted online, demands a review of European Union budget rules, an end to economic sanctions on Russian Federation and pledges to roll-back pension reforms that raised the retirement age.

Worries about political risks had jolted Italian markets and pressured the euro on Wednesday following reports that Italy's anti-establishment 5-Star Movement and anti-immigrant League may ask the European Central Bank to forgive 250 billion euros of debt as the parties worked to draft a coalition programme.

The pre-election adversaries have spent the last few days trying to fuse their very different programs into a "contract" of mutually acceptable policy commitments.

"There is a real danger that the new Italian government could, through its irresponsible economic policies, set the stage for the next eurozone crisis", an European Union official told Reuters. Carlo Cottarelli, a former senior International Monetary Fund official, estimated the annual cost of the measures at as much as 126 billion euros (110 billion pounds), while Corriere della Sera newspaper estimated 65 billion euros. Economists say this would cost well over 50 billion euros in lost revenues. In the face of voter disappointment, each group will be able to say it was forced to compromise with its partner.

The prospect of the first populist government in a founding member will send tremors through the European Union's political class as well, after it scraped through the euro-area debt crisis and found fragile unity after the shock of Brexit, only to be confronted with multiple challenges by U.S. President Donald Trump.

That was enough to spook Italian markets, even though the League's economic spokesman told Reuters that debt cancellation was never in an official draft of a government programme. The policy programme will probably be published on Thursday, 5-Star said.

The euro gave up gains and fell 0.2 percent to $1.1778 after the Italian parties outlined their economic plans.

The likely new government might increase the debt further, as Five-Star's leader Luigi Di Maio said that "the recipe to lower public debt is by investments and expansionary policies". It might also dismay Italian President Sergio Mattarella, who has repeatedly stressed the importance of maintaining a strong, pro-European stance.

Energy shares rose 1.3 percent on the higher oil prices. Bagnai said negotiation would be needed to find common ground on the matter with 5-Star.

"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. The spread is a "cynical board game of high finance", he said.

"It would be insane 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.

Italian two-year bond yields meanwhile jumped nearly 20 bps to 0.116 percent IT2YT=RR, trading above zero percent for the first time since May 2017, according to Reuters data.