Italian markets spooked by populist proposal

Italy's populist government is still a work in progress

Italian markets spooked by populist proposal

The anti-establishment 5-Star Movement and the far-right League party plan to ask the European Central Bank to forgive the debt, according to a draft the parties are working on, the Huffington Post Italia website reported late Tuesday.

With debt of around 132 percent of GDP and slow economic growth, Italy has always been a worry for euro zone policy-makers.

While in Rome the leaders of the Five-Star Movement (M5S) and the League are taking more time to form a government, the European Union is in a state of uncertainty - waiting for the impact of a eurosceptic leadership in its fourth-largest member.

"In short, trust towards Italy is bound to face heavy tests under a M5S/LN government, even if the two parties will not be able to implement their program in full", he said. The additional yield demanded from holding Italian 10-year debt over equivalent German bonds widened to 152 basis points.

"It is totally nuts".

"If the market continues to trade off USA yields and diverging economic data between the US and European Union, it's hard to argue against the current direction in yields or the dollar", Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore, said in a note.

League leader Matteo Salvini and 5-Star Movement leader Luigi Di Maio are insisting they are close to a deal created to help ordinary Italians.

The opposition Democrats have warned that the League's vow to drastically lower taxes to a flat 15-percent rate and the 5-Stars' promise of subsidies to the poor will drastically drive up government borrowing. Economists say this would cost well over 50 billion euros in lost revenues.

The likely arrival of a populist government took its toll on the Italian banking sector at the Milan Stock Exchange Thursday, in particular the Monte dei Paschi di Siena bank, majority-owned by the Italian state, which saw its share price tumble.

In equity markets, MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.1 percent, while Japan's Nikkei gained 0.7 percent.

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But that relaxed attitude could change if a populist government in Rome were to start a serious attempt to implement its vision for a return to the pre-Maastricht days.

"They have already become more moderate and this will probably continue".

"They can give me two answers: they can say yes, or they can say no".

"For small caps, they are not exposed to a lot of the risks that larger caps are facing", McMillan said.

The benchmark 10-year U.S. Treasury note yield rose above 3.1 percent, continuing a surge from earlier in the week.

So far, ambitious plans from French President Emmanuel Macron have met with a cool reception in Berlin. Italy is the single-currency area's third-biggest economy and one of the founding members.

For instance, the EU's Migration and Home Affairs Commissioner Dimitris Avramopoulos said he hopes Italy's policy on asylum seekers does not change under the new government.

The League's Armando Siri told La7 television on Wednesday that a write-off of debt owed to the European Central Bank (ECB) was being discussed.

It would also for the first time mean rules on how a sovereign debt restructuring in the euro zone would be carried out. 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.

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