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

Luigi Di Maio is the leader of the 5 Star Movement

Five Star became Italy's largest party after gaining almost 33 percent of the vote, while the League - shorn of the rest of the rightwing coalition that won 37 percent - will be the junior partner with 17 percent.

But the biggest single bloc is a center-right alliance of Salvini's League and Berlusconi's Forza Italia party that garnered 37 percent of the vote.

Yet the market's reaction was remarkably muted.

League leader Matteo Salvini said he was not intimidated by a rise in bond yields.

The parties had made progress on agreeing a prime minister, Di Maio said, but he did not give a name. Neither Salvini nor Di Maio want the other to get the job, but they have yet to find a mutually acceptable alternative figure. The leaked draft also proposed asking the European Central Bank to "freeze" or "cancel" €250bn in Italian debt that it holds after the end of its quantitative easing bond-buying programme - another highly contentious proposal that could unnerve markets and policymakers.

Italy's borrowing costs jumped and its stocks slid on the news even after Borghi said the request for debt forgiveness was not in an official draft of their program. Italy's 10-year bond yield climbed almost 19 basis points to 2.13 percent and that was its highest level since early March and the biggest one-day rise since March 2017.

A draft of the accord reviewed by Reuters earlier on Thursday spelt out a plan to cut taxes, increase welfare payments for the poor and scrap an unpopular pension reform which seems incompatible with European Union rules on fiscal discipline.

Italy is a country "of maximum importance" for the European Union, EU Commission President Jean-Claude Juncker said. It would make "a mockery" of the eurozone's fiscal rules, whereby the government must keep a tight lid on its budget deficit to start tackling its unsustainable debt pile of 130% of GDP.




The gap between Italian benchmark bond yields and the safer German equivalent reached its widest in seven weeks last week on news that a deal was at hand, but it had narrowed again by Friday and shows no sign of getting out of hand. The bigger the spread, the lower investor confidence and the higher the interest rates the country has to pay to borrow money.

"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.

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.

Berlusconi has refused to govern with the 5-Stars, who he regards as "more risky than communists".

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 comments are taking a page out of U.S. President Donald Trump's book and rallying cry "America First".

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

5-Star has adopted a softer line on migration and Salvini said on Monday this was another area of discord between the two sides.

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