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Italy threat to rip up Eurozone rules shakes European Union powerbrokers

18 May 2018

On the question of prime minister, he said: "We are still working that out".

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.

In calculating debt as a proportion of gross domestic product - Italy's ratio of more than 130 percent is second only to Greece in Europe - the draft accord proposes discounting hundreds of billion euros in Italian debt purchased by the European Central Bank under the bank's quantitative easing (QE) programme.

Salvini said that the contract - and an interior minister from the League - would make sure that "only people with a right to enter Italy" would do so.

The report spooked markets, even though the League's economic spokesman told Reuters that debt cancellation was never in an official draft of a government program.

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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.

As a direct challenge to European Union fiscal rules, the draft accord also wants the bloc to create fiscal headroom for spending by adjusting the formula for Italy's debt burden, which the rules say must be reduced.

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

The gap over benchmark German Bund yields widened to 148 bps, its widest since the day after Italy's March 4 election.

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.

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"Don't forget that Italy does have a very high debt stock so every basis point matters".

If the Five Star-League plan were to fall apart, Mattarella could revert to an earlier idea to appoint a non-partisan premier, though both populist groups have said they'll use their blocking majority to shoot down any such candidate and trigger new elections.

A 5-Star source had said the program contained no reference to a possible exit from the euro or "anything that could cause any concern regarding Italy's euro membership". President Mattarella and parliament must also approve the nominee for PM.

The head of state has made it clear that he will only look at the definitive version of the text, after a draft leaked earlier this week caused consternation with proposals that would allow Italy to leave the euro, demand financial concessions from the European Union and withdraw sanctions on Russian Federation. 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.

President Sergio Mattarella, who has repeatedly stressed the importance of maintaining a strong, pro-European stance, may also be dismayed at the deal the League and 5-Star come up with.

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Italy threat to rip up Eurozone rules shakes European Union powerbrokers