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

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

Italy's 5-Star Movement and the far-right League have completed a joint policy program meant to be the basis for a coalition, with their respective leaders due to have the final word, party officials said on Wednesday.

Matteo Salvini of the League.

Italian stocks edged higher after selling off on Wednesday after details of a draft coalition document showed plans to ask the European Central Bank to forgive 250 billion euros ($294.70 billion) in debt.

"I am proud of the time, the days and nights spent, not talking of ministers but of the future of Italy", he said as he travelled to northern Italy where regional elections will be held Sunday. League chief Matteo Salvini and Di Maio have not yet agree who will be the premier of the new government.

The benchmark 10-year US yield hovered above 3.1 percent, continuing a surge higher earlier in the week.

The 39-page draft, obtained by Huffington Post Italia, reflected the difficulties the two pre-election rivals face in finding the resources needed to pay for promises they made to their voters during the campaign.

This will now be something to watch as populism is back on the agenda for markets where the coalition has radical ideas to free up billions of euros for tax cuts and welfare.

They have both vowed to scrap an unpopular pension reform - a move that would punch a 15-billion-euro hole in state coffers. But with Italy's public debt at more than 130% of GDP, the measures will be hard to achieve, undoubtedly leading to clashes with the EU. Italy's main share index closed up 0.3% and the gap between the yields on Italy's benchmark bonds and safer German bonds retreated after briefly widening on Thursday to their widest since early January.

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.

The prospect of the first populist government in a founding member will send tremors through a European Union that scraped through the euro-area debt crisis and found fragile unity after the shock of Brexit, only to be confronted with multiple challenges by US President Donald Trump. The sanctions have had a major knock-on effect on the Italian economy, as Russia is a top importer of Italian products and one of the top European tourist destinations for Russian travellers.

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.

5-Star deputy Alfonso Bonafede also said the policy document was completed.

The parties said on Tuesday they want to "re-think" 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. 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. Each party plans to consult its supporters over the weekend to see if they back the nascent government pact.

Salvini, meanwhile, pledged that on Monday the two parties would be in a position to formally present President Sergio Mattarella with the results of the talks.

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