Italy's Berlusconi Gives Green Light to a Populist Tie-Up

(Bloomberg) -- The chances of a populist government ruling Italy received a sizable boost from Silvio Berlusconi as he dropped his opposition to a tie-up.

After more than two months of maneuvering between the anti-establishment Five Star Movement and the anti-immigrant League, four-times premier Berlusconi yielded to pressure, including from his own lawmakers, and pledged that he is open to the two parties governing together. Italian bonds fell.

President Sergio Mattarella has given the two populist forces until Thursday afternoon to decide whether they can forge a majority. Efforts so far had been thwarted by Five Star Leader Luigi Di Maio’s demand that League head Matteo Salvini drop his alliance with Berlusconi’s Forza Italia.

Potential premiers of a Five Star-League government include Giancarlo Giorgetti, a senior League lawmaker, League senator Giulia Bongiorno, and Five Star’s Roberto Fico, speaker of the lower house, newspaper Corriere della Sera reported Thursday. Di Maio could serve as foreign minister, and Salvini as interior minister, the paper said.

The spread between Italian 10-year bonds and similarly dated German bunds widened by 6 basis points to 139 at 9:01 a.m. Thursday in Rome, the widest since March. The gap has increased by 16 points in the past three sessions.

Berlusconi Overtaken

Berlusconi was forced from office at the height of the financial crisis and had been expected to make his latest comeback in the March 4 election. Instead, his party was overtaken by the League, handing Salvini control of their center-right alliance, the biggest group in the legislature.

Berlusconi said in a statement on Wednesday night that he would not veto a Five Star-League administration, and would support measures which are in line with the policies of the center-right bloc.

Salvini responded by thanking Berlusconi, saying “we must now work on the program, timings, the team and the things we have to do. Either we reach a deal quickly, or we vote.” Di Maio said he planned to meet Salvini on Thursday. “We’ll start with the issues and then we’ll move on to names” of ministers, he said.

Italy's Berlusconi Gives Green Light to a Populist Tie-Up

The 81-year-old Berlusconi, who had previously opposed a Five Star-League tie-up, said he would respect a decision of “another political force of the center-right to create a government with Five Star.” He added: “We would not impose vetoes or pre-conditions.”

‘Loyal Support’

Berlusconi said he would not back a parliamentary vote of confidence for such an administration “but we would calmly and without prejudice assess the work of the government.” He said his party would “loyally support” laws in line with the center-right’s program. He added that his stand did not mean the end of the center-right bloc.

Berlusconi’s green light is a key step toward a populist government, but the parties involved have yet to agree on a premier, cabinet ministers and priority policies.

A populist-led government has been described by some as an investor’s nightmare because the two parties’ spending policies are seen as insufficiently funded, while they plan to scrap a pension reform and seek an overhaul of European Union treaties.

"A political government is now more probable, and a mild negative market reaction is likely," said Vincenzo Longo, an analyst at IG Markets. "This coalition was the most feared by markets even before the vote, given their anti-establishment views, and market impact has been limited by their less extreme views on the euro and Europe since their campaign, but the impact may only emerge in the longer term."

Berlusconi Ban

Since the March elections, Berlusconi had been holding Salvini to his pre-election pledge not to abandon their coalition, effectively blocking attempts at a deal with Five Star. Berlusconi himself is barred from holding public office until next year because of a 2013 tax-fraud conviction.

With Mattarella preparing to nominate a non-partisan figure as prime minister in an effort to break the deadlock, Di Maio and Salvini met in Rome Wednesday for one more attempt to agree on an alliance.

If the two populist parties fail, the president is expected to go ahead with his plan, even though they have vowed to use their blocking majority to defeat his candidate in a confidence vote. That would trigger a snap election perhaps for July.

The president will be attending a conference in Florence all day on Thursday, then flying straight to Sicily for another gathering, returning to Rome at lunchtime Friday.

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