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Italy's 5-Star, League rattle markets in bid to clinch government deal

Plan to ask ECB to forgive €250bn debt

Italy's two anti-system parties are floating radical ideas to free up billions of euros for tax cuts and welfare, including asking the European Central Bank to forgive debt, in a bid to clinch a government deal after 2-1/2 months of stalemate.

Late on Tuesday, a draft coalition programme for the anti-establishment 5-Star Movement and the far-right League leaked. In it, the parties said they planned to ask the ECB to forgive €250 billion of Italian debt purchased under the eurozone central bank's quantitative easing (QE) programme.

The news drove up Italian bond yields and the cost of insuring Italy's debt against default, before Claudio Borghi, the League's economics chief, told Reuters the request for debt forgiveness was never in an official draft of their programme. After Borghi's comments, yields fell slightly but remained above Tuesday's levels.

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.

The ECB holds a total of about €2.4 trillion of government bonds under the QE programme. The central bank had no immediate comment.

Despite Borghi's comments, Italy's five-year credit default swaps were up five basis points to their highest levels since the end of March. Italy's stock market dropped about half a percentage point.

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 per year, according to some estimates, while 5-Star has pledged new welfare payments for the poor costed at €17 billion.

They have both vowed to scrap an unpopular pension reform - a move that would punch a €15 billion hole in state coffers.

Italy already has an enormous debt worth more than 130 per cent of annual output, second only to Greece in the EU.

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

NO EURO EXIT

The parties said on Tuesday they want to "re-think" the eurozone'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.

The leaked document also proposed "economic and judicial procedures that allow member states to leave monetary union", but the parties swiftly issued a statement saying exit from the common currency was not being considered in their progamme.

Both groups have a history of euroscepticism. 5-Star has moderated its position considerably in the last year, rowing back on a previous plan to hold a referendum on Italy's membership of the currency bloc. However, the League still wants to leave the euro zone as soon as politically feasible.

They also share an anti-establishment sentiment that has taken root in Italy but which has international parallels such as Britain's vote to leave the EU and the US election of President Donald Trump.

On Tuesday, the League said it was ready to wage war on the EU budget rules and put "Italians first".

The leaked draft called for a renegotiation of Italy's EU budget contributions, an end to sanctions against Russia, and the dismantling of a 2011 pension reform that raised the retirement age.

The League and 5-Star have held a week of talks aimed at putting together a coalition government and ending more than 10 weeks of political stalemate following an inconclusive election on March 4.

Both parties plan to consult supporters over the weekend to see if they back the government pact. An official copy of the programme has yet to be published.

EU leaders meeting in Sofia on Wednesday are likely to be concerned about the rhetoric coming from the parties that could form a new Italian government as early as next week.

President Sergio Mattarella, who has repeatedly stressed the importance of maintaining a strong, pro-European stance, may also be dismayed.

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