Italian Populists Seal Pact to Challenge EU Establishment

039;Italy will be questioning the whole organisation of the eurozone and of the EU,' said political scientist Sergio Fabbrini

039;Italy will be questioning the whole organisation of the eurozone and of the EU,' said political scientist Sergio Fabbrini

Earlier, the leaders of the anti-immigrant League party and the anti-establishment Five Star movement agreed to meet the Italian President to share details of a government programme for the eurozone's third largest economy, thrashed out over the weekend.

The outgoing centre-left administration promised the fiscal deficit would fall this year to 1.6 percent of GDP from 2.4 percent in 2017, and then decline to 0.8 percent next year with a balanced budget in 2020.

Italy inched closer towards ending more than two months of political deadlock on Thursday as anti-establishment leader Luigi Di Maio said he was confident an agreement would be reached on forming a coalition government with the far-right.

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.

"I think it's the same thing we have had really for the past couple of weeks: The inflation trade is being put on", said Walter Todd, chief investment officer at Greenwood Capital in Greenwood, South Carolina.

"This is very early days and most people believe a watered-down version will materialize finally, which also would be some concern to investors", said Ioannis Sokos, a European rates strategist at Nomura in London.

If this radical populist government had emerged three years ago, there would have been a panic in the bond markets, says Ambrose Evans-Pritchard in The Daily Telegraph.

"There is a real danger that the new Italian government could, through its irresponsible economic policies, set the stage for the next euro zone crisis", a second senior official involved in euro zone policy-making said.

USA 10-year Treasury yields rose, extending this week's bond market selloff, as traders and investors have not reached a consensus on whether it was time to buy or if the market was vulnerable to more selling.

So far, ambitious plans from French President Emmanuel Macron have met with a cool reception in Berlin. This was partly out of a belief that while they would push Brussels to relax fiscal rules - not unlike Italian governments of the past, and other European Union governments such as France and Spain - they would not seek to pull their country out of the single currency. They have both vowed to scrap an unpopular pension reform - a move that would punch a 15-billion-euro hole in state coffers.

Polls have consistently shown that most Italians are against a departure from the single currency as well as the European Union, despite growing dissatisfaction.

The ECB holds a total of about 2.4 trillion euros of government bonds under the QE program.

Losses in Asian share markets, however, were limited after US equities advanced on Wednesday, led by retail and technology shares, even as a rise in USA 10-year Treasury yields to an nearly seven-year high suggested more competition for equities. Banks led losses as the FTSE MIB index of shares sank 1.1 percent for the worst performance in Europe, while credit-default swaps on the debt of both the government and financial institutions rose.

"An alternative scenario is that the European Central Bank would feel like it couldn't raise rates without provoking a crisis in Italy and therefore monetary policy begins to lose its independence. Not likely, but still." the official said.

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