Italy Bonds Roiled as Populists Debate $300 Billion Write-Down

(Bloomberg) -- Italian bonds slumped as populist parties struggling to form a government discussed a potential government debt write-down worth billions of euros.

League lawmaker Armando Siri told La7 television on Wednesday that the anti-immigrant League and the anti-establishment Five Star Movement are discussing a 250 billion euro ($300 billion) write-off from the European Central Bank. He was confirming an earlier report on a draft plan by the Huffington Post.

The ECB is barred from directly financing governments under the Maastricht Treaty. An ECB spokesman declined to comment on the leaked draft. The yield on benchmark 10-year notes climbed above 2 percent for the first time since March on the news.

“This is all fairly disruptive stuff for Italian bonds,” said Jason Simpson, a strategist at Societe Generale SA. “The markets had been assuming that they would tone down some of their more radical views.”

Talks between the League led by Matteo Salvini and Five Star headed by Luigi Di Maio are dragging on. “The next hours are the ones in which we will make a decision,” Salvini told reporters in Rome Tuesday. “Either a strong government will start, or we will responsibly say we tried.”

Other thorny issues include who will actually govern as neither leader has yet publicly said whom they are backing to lead the administration. Corriere della Sera reported Tuesday that Salvini and Di Maio may alternate at the helm or have different party members take turns. Di Maio responded to criticism that talks were taking too long in a Facebook video on Tuesday saying that forming a government takes time and they are working hard.

The FTSE MIB benchmark stock index was down 0.8 percent in early trade, underperforming the Stoxx Europe 600 index which was up 0.1 percent. The FTSE MIB remains the top performer among the major European stock indexes this year, up 10 percent.

Opposition to Spending

While Di Maio said the two parties had made progress on plans for a “citizen’s income” and rolling back recent pension changes, Salvini said more work was needed on the policies of the next administration. Mattarella has agreed to the extension for the talks without putting a date on their next meeting.

Analysts say that their spending plans -- which include slashing the main tax rate for companies and individuals to as low as 15 percent -- are potentially so destabilizing for Italy’s precarious public finances that they would likely run into significant obstacles either from the courts or the parliament.

Mattarella himself has been concerned about the impact of the populists’ pledges on fiscal and foreign policy since Salvini’s center-right alliance and Five Star emerged as the biggest groups from the March 4 election.

Parties to Vote

The parties’ draft policies so far echo their key campaign proposals -- a flat tax for the League, and Five Star’s citizen’s income for the poor. Di Maio and Salvini, as well as party officials, held marathon talks throughout the weekend to finalize the program.

Depending on their progress, Mattarella could name a premier-designate this week. He or she would meet party leaders before presenting a list of ministers to the president for approval. The new government would then be sworn in before facing a vote of confidence in both houses of parliament.

--With assistance from Lorenzo Totaro and Kevin Costelloe

To contact the reporters on this story: John Follain in Rome at jfollain2@bloomberg.net, John Ainger in London at jainger@bloomberg.net, Chiara Albanese in Rome at calbanese10@bloomberg.net.

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Ven Ram at vram1@bloomberg.net, Ben Sills, Alessandra Migliaccio

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