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Italian parties agree basis for government deal, say no threat to euro

Italian parties agree basis for government deal, say no threat to euro

As Italy moves closer to the formation of a government between the anti-establishment 5-Star Movement (M5S) and Lega (League), a leak to Huffington Post of a 40-page policy contract between the two Eurosceptic parties that details their roadmap rattled worldwide markets on Wednesday. M5S leader Luigi Di Maio and the League's Matteo Salvini will have the final say, reviewing and signing the document before presenting it to President Sergio Mattarella.

5-Star's parliamentary party leader Danilo Toninelli told state television Rai: "The only way to get a serious government is to return to the polls".

The two populist parties have been holding talks aimed at forming a coalition government and ending 10 weeks of stalemate following an inconclusive election on March 4.

The policies would cost many billions of euros and have spooked investors in Italian debt, shares and the euro.

The forerunner of Salvini's League, the Northern League, was the main partner in the three center-right governments headed by former Premier Silvio Berlusconi starting in 1994.

Not so long ago, a document as radical as the draft Italian coalition programme that surfaced on Tuesday night would have sent the markets into meltdown.

"A non-political prime minister poses some problems because they would find themselves with a program that has been written by other people", said a 5-Star source, adding that Di Maio had not yet lost hope that he might take charge.

Instead of debt forgiveness, 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's Stability Pact, Borghi said.

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.

The gap between the yields on Italy's benchmark bonds and safer German bonds was at its widest since early January as Italian 10-year yields were set for their biggest two-day jump since March last year.

The bloc's budget rules require it to cut the debt pile aggressively under the "fiscal compact", which both parties want scrapped.

Claudio Borghi said Monte Paschi will remain in public hands following a bailout past year and branch closures planned by the outgoing center-left government would be rolled back.

Brussels has called on the next Italian government, which is likely to be formed by Eurosceptic parties, to remain on the "European path" and not tear up the EU's strategy for controlling migration.

With tensions high, Valdis Dombrovskis, the vice-president of the European Commission, warned that Italy should maintain its commitment to gradually reduce the public deficit and debt.

The issue lay dormant during this year's election campaign as both parties continued to shy away from aggressive stances on the single currency, fearing it could scare voters.

Each party plans to consult its supporters over the weekend to see if they back the possible pact for government.

5-Star's flagship policy of a universal income for the poor has been costed at around 17 billion euros ($20 billion) per year.

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