Italian markets spooked by populist proposal

5-Star leader Luigi Di Maio

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.

On Thursday evening, League leader Matteo Salvini said it would be handed to Mattarella on Monday, by which time he and Di Maio should also have their candidate for prime minister.

It was not clear when these and other measures would be adopted, and there was still no word on the thorny issue of who would be prime minister. League chief Matteo Salvini and Di Maio have not yet agree who will be the premier of the new government.

A previous draft dated May 14 and leaked to the press said Italy should request a 250-billion-euro debt cut from the European Central Bank, which prompted the Milan-based stock exchange to plunge by 2.32 percent and pushed the spread to 151 basis points (from 130 points Tuesday) at Wednesday's close.

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. The League has pledged to introduce a flat tax rate of 15 per cent, which would lower tax revenues by some 80 billion euros ($95 billion) per year, according to some estimates, while 5-Star has pledged new welfare payments for the poor costed at 17 billion euros.

The bloc's budget rules require it to cut the debt pile aggressively under the "fiscal compact", which both parties want scrapped. 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. European stock markets climbed and Britain's FTSE 100 notched a record closing high.

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"The near-term picture remains positive for the dollar with Treasury yields showing few signs of topping, a move that makes the buck a more enticing bet to income-seekers", said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. He declined to comment on the outcome of the coalition talks.

If approved, the program will then be presented to Italian President Sergio Mattarella.

The League-Five Star draft document also states their "intention to oppose" worldwide trade treaties such as the EU-Canada Comprehensive Economic and Trade Agreement (CETA), the Transatlantic Trade and Investment Partnership (TTIP), and ongoing negotiations to grant China market economy status (MES). 5-Star has moderated its position over the previous year, but the League still wants to leave the eurozone as soon as politically feasible.

While few people see that as either a realistic proposal or one that would remain in the coalition's agenda, the tone of the new government's stance toward euro zone rules was seen as confrontational and spooked some investors.

Another proposal causing alarm in financial markets is the creation of "economic and judicial procedures that allow member states to leave monetary union".

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