Democrats, Five Star Back Conte to Lead New Government: Italy Update

(Bloomberg) --

Italy’s anti-establishment Five Star Movement and center-left Democratic Party agreed to form a new government led by Giuseppe Conte, capping days of stop-and-go negotiations and bickering over cabinet posts. Both parties on Wednesday afternoon met with President Sergio Mattarella, the only one with the power to appoint the prime minister or dissolve parliament. Matterella is poised to make a decision later Wednesday or Thursday morning. Bond investors are pricing in a positive outcome that would avoid snap elections.

Key Developments:

• Italian bonds rallied as yields slid to a record low on Wednesday as talks gained momentum
• Democratic Party leader Nicola Zingaretti and Five Star head Luigi Di Maio told Italy’s president they support the current attempt to form a new government led by Conte
• President Mattarella’s consultations with the major parties began at 4 p.m.

Five Star, Democrats Agree to Form New Coalition (7:13 p.m.)

Five Star leader Luigi Di Maio, speaking after meeting President Sergio Mattarella, said he told the president there is a political accord on Giuseppe Conte staying on as premier.

Di Maio alluded to the controversy over his insistence on staying on as deputy premier, and told reporters: “I am interested in what is best for the country, not for myself.” He said drawing up a cabinet can only come after a common program is drawn up.

Italy Set to Get Boost From Lower Yields (6:58 p.m.)

The prospect of a coalition deal, amid the anticipation of a fresh stimulus program from the European Central Bank, has pushed Italian yields to a record low. And this means that the new government will find Italy’s finances in better shape than might have expected.

“From a purely arithmetic perspective, this drop in yields, if sustained, could have huge implications,” according to Frederik Ducrozet, global strategist at Banque Pictet & Cie.

Ducrozet’s back-of-the-envelope calculation suggests the lower yields means the Italian Treasury could save more than 1% of GDP on an annual basis. This would ease the new government’s first challenge, finding 23 billion euros to offset an automatic VAT increase in 2020.

Salvini Calls for Elections, Blasts Proposed Tie-Up (6:48 p.m.)

League leader Matteo Salvini blasted the proposed tie-up between Five Star and the Democratic Party, saying that it would be a weak majority, and that the only glue that would hold the alliance together would be “hatred for the League.”

“This is the first government that is already quarreling even before it’s born,” Salvini told reporters after meeting with Italian President Sergio Mattarella in Rome. “This government was conceived in Biarritz at the behest of the G-7; a premier suggested by Paris, Berlin and Brussels.”

Riding high in the polls, Salvini triggered the crisis in the hope of forcing a snap election and becoming prime minister in the autumn. Instead, he’s gone from being Italy’s most powerful politician to a sideshow in the political drama. To be sure, elections in six months could still crown him, but for now, “Il Capitano,” as he’s known by his followers, hasn’t reaped much success from his bold move.

Markets Rally on Prospect of New Coalition (5:42 p.m.)

Investors are growing increasingly confident that a Five Star-Democratic alliance will be formed, averting the prospect of fresh elections and promising to avoid a potential budget clash with the European Union. Markets see that as a more positive outcome than a government headed by League leader Matteo Salvini, whose party is leading in the polls.

Italian bonds enjoyed their second day of an impressive rally, with 10-year yields dropping below 1% for the first time on record. They are now just half of what they were at the start of July, with the premium over those on German bonds touching 170 basis points, the lowest level since the formation of the previous coalition last year. Italian stocks also bucked declines across the rest of the region.

Five Star in Hot Seat Before Presidential Meeting (4:53 p.m.)

President Sergio Mattarella at 4 p.m. met with Democratic Party leader Nicola Zingaretti, who gave his blessing to a new coalition with Five Star. Forza Italia is expected to meet with the Italian head of state at 5 p.m., and then the League an hour later. Five Star will have their consultation with Mattarella at 7 p.m., when they’re expected to also back an alliance with the PD.

PD Leader Says He Accepts Five Star Proposal (4:33 p.m.)

Nicola Zingaretti, head of the Democrats, or PD, said his party supports the current attempt to form a new government and accepts Five Star’s proposal for prime minister. Though that likely means a return of Giuseppe Conte as premier, Zingaretti reiterated that his party seeks a government of “discontinuity” to mark a change from the last administration.

Zingaretti, speaking after meeting with the president, called for a more business-friendly government and an end to the rancor which marked the outgoing coalition.

PD, Five Star to Go to President With Program (2:58 p.m.)

Five Star, the Democrats and smaller parties set to join Italy’s new government coalition are seeking to present President Mattarella with a common program, Andrea Marcucci, head of the Democrats’ Senate delegation, told reporters.

Separately Andrea Orlando, a PD deputy secretary, confirmed his party will signal to Mattarella their support for Conte as Premier. If both the main parties are in agreement Conte could get a conditional mandate from Mattarella.

The deputy premier role continues to be a sticking point, with the PD insisting the new government will have only one (the outgoing administration had two), and that it will be a PD appointee.

Italy Yields Hit Record Low as Talks Move Ahead (2:25 p.m.)

Bonds surged to take the Italian benchmark yield to a record low as investors saw prospects for a new government to emerge from the last day of consultations between major political players and the country’s president.

Ten-year yields dropped below 1% for the first time and their premium over Germany, a key gauge of risk in the nation, touching their lowest level since May last year -- when the previous coalition was being formed.

“It seems like the market can only believe in a positive outcome,” said Jens Peter Sorensen, chief analyst at Danske Bank.

Direct Democracy a Final Hurdle for a New Coalition (1:17 p.m.)

There could be another stumbling block for Giuseppe Conte’s new government, if and when the two parties reach an agreement solid enough to convince President Sergio Mattarella: Five Star activists will vote online on the coalition.

Direct democracy is one of the movement’s hallmarks but the leadership usually frames its questions in a way that assures the base’s support.

According to a survey published by Corriere della Sera, almost half of Five Star supporters want a government with the Democrats, while less than a third want to go back to the old alliance with Matteo Salvini’s League. Only 13% want snap elections.

Italy Media Focuses on Conte’s Remarkable Comeback (12:53 p.m.)

“There he is again,“ la Repubblica writes, as two main parties back a return of the outgoing prime minister. Given up for dead politically just a week ago, it is a remarkable turnaround for the law professor who was plucked from obscurity in early 2018 to front the populist government.

As the coalition descended into paralysis and constant bickering, Conte morphed from an impartial referee -- who critics called “Mr Nobody” -- into a political force of his own. He won esteem of fellow leaders at international gatherings -- so much so that Donald Trump explicitly endorsed a second term.

At home, his ratings have gone up and even critics recognize he has deftly managed relations with the European Commission.

The soft spoken, pious Conte, with his preference for long sentences and tailored suits, is quietly enjoying his celebrity status -- and appears to have a knack for holding onto it.

Italian Bond Yield Touches Record on Optimism (12:47 p.m.)

A second-straight day of gains in government bonds drove Italy’s 10-year yield to a record 1.02%, beating the previous all-time low that was set in March 2015. That brought Italy back in line with rates across the euro-area that have plunged this year on prospects for extra monetary stimulus. The Italy-Germany yield spread narrowed as much as nine basis points to 173 basis points, the tightest since May 2018.

Italian Bonds Rise on Optimism of Coalition Deal (12:31 p.m.)

Italian government securities rose after talks between Five Star and the Democrats gained pace. The benchmark 10-year yield fell 9 basis points to 1.05%, above the record low of 1.03% set on March 12, 2015. The Italy-Germany yield spread narrowed as much as 7 basis points to 176 basis points, the tightest since May 2018.

Five Star Throws Weight Behind Conte (12:20 p.m.)

Like the Democrats, Five Star will also throw its weight behind Giuseppe Conte staying on as premier at the head of a new coalition, at a meeting with President Sergio Mattarella, according to three officials who declined to be named on a confidential issue.

Five Star leaders will meet the head of state at 7 p.m., ending a second round of consultations by Mattarella.

PD Leader to Back Conte in Talks With President (11:57 a.m.)

Democratic Party leader Nicola Zingaretti will signal his backing for Giuseppe Conte to stay on as premier when he meets President Sergio Mattarella later Wednesday, according to three senior PD officials who declined to be named discussing confidential talks.

Five Star leader Luigi Di Maio is still insisting on keeping his post as deputy premier, a bone of contention between the two parties, another official commented separately.

Italian Bonds Rise on Optimism of New Coalition (11:36 a.m.)

Italian bonds rose on Wednesday after Democratic leader Nicola Zingaretti asked a leadership meeting to back efforts to form a new government, indicating movement toward a coalition deal.

Benchmark 10-year yields fell 1 basis point to 1.12%, while the spread to German government bonds was little changed at 183 basis points.

Democratic Leadership Backs Coalition Effort (11:24 a.m.)

Democratic Party leader Nicola Zingaretti asked a leadership meeting to back efforts to form a new government with a designated premier, without naming the person, according to comments cited by newswire Ansa.

“I ask you for a clear mandate” to signal our availability to President Sergio Mattarella, Zingaretti told a gathering in the lower house in Rome, Ansa said.

The meeting backed Zingaretti and gave him a standing ovation, according to a senior PD official who declined to be named.

Democratic Leader Says Talks Remain ‘Difficult’ (11:05 a.m.)

For Nicola Zingaretti, the head of the Democratic Party, the path to forming a new alliance “was and remains difficult,” according to comments cited by newswire Ansa.

“It’s not walk in the park,” Zingaretti added in remarks at a PD leadership meeting in the lower house of parliament, Ansa said. He also said the party had warmed to the idea of Conte as premier “because that’s what Five Star decided.”

Democrats Say Deputy PM Post Condition for Deal (10:48 a.m.)

A Democratic Party official indicated that placing one of their own to the deputy premier post is a condition for a coalition agreement with the Five Star Movement.

“If the prime minister is indicated by Five Star then a Democrat should be the deputy,” Andrea Orlando, a PD deputy-secretary, said. “It would show we are really entering into a new phase, it is a political condition we make.”

Democrats’ Chief Says He’s Optimistic for a Deal (10:42 a.m.)

Nicola Zingaretti, head of the Democratic Party, struck an upbeat tone as he arrived at the lower house of parliament in Rome for a meeting of the group’s leadership.

“I’m always optimistic,” Zingaretti told reporters in comments cited by newswire Ansa.

Unicredit Sees ‘Significant Rally’ on Coalition Deal (9:56 a.m.)

Italy’s 10-year yield spread over Germany could narrow to 150 basis points, a level not seen since May last year, in the next several days should the Five Star Movement and Democratic Party form a coalition, according to UniCredit.

“While a greater than 50% likelihood of this outcome is already priced in, the confirmation in our view gives 10Y BTP-Bund spreads further room for tightening over the next several days, with our target range being 150-170bp,” strategists led by Edoardo Campanella write in the report. “We expect a significant rally to take place.”

Mattarella Could Give Conte a Week to Form Team (9:32 p.m.)

President Sergio Mattarella could give Premier Giuseppe Conte a mandate to try to form a new government as early as Wednesday evening, if Five Star and the Democrats reach an agreement on forming a coalition, according to a senior state official who asked not to be identified discussing a confidential issue.

The head of state could give Conte a week to draw up a cabinet and a government program, if Conte requests this, the official said.

Mattarella, who will meet Five Star and Democratic leaders Wednesday afternoon, has demanded that they present him with a deal which involves a solid parliamentary majority and a government program lasting until the end of the current legislature. Failing this, he would dissolve parliament, triggering snap elections possibly in November.

Coalition Talks Stall on Five Star Ultimatum (9:11 a.m.)

Talks between the Five Star Movement and the Democratic Party stalled after Luigi Di Maio, leader of Five Star, insisted on keeping his job as deputy premier in a new coalition, according to five officials from both parties.

The Democrats must accept Di Maio as deputy premier alongside a Democratic counterpart or the talks will collapse, said a Five Star official, who asked not to be identified because the negotiations are ongoing.

The process is stalled following a call late Tuesday night between Di Maio and Democratic leader Nicola Zingaretti, the officials said. The Democrats see Premier Giuseppe Conte as a Five Star figure, and cannot accept Di Maio as a deputy premier because that would give Five Star too much power, three PD officials said.

Five Star and Democrat officials were however meeting Wednesday morning to discuss a possible government program. The talks have been plagued by public posturing as both sides repeatedly threaten vetos, chiefly over jobs.

Democratic officials were still sanguine when they entered talks with Five star Wednesday morning, signaling optimism a deal can be reached. “Hopefully it’s going to be a good day,” PD Senator Andrea Marcucci told reporters adding he doesn’t see any “veto” on Di Maio’s role by his party, adding to the confusion.

Earlier:

Italy’s Unlikely Government Faces Crunch Day as Talks Falter
Italy Politics Roundup: Coalition Deal Hangs on Vice Premier Job
Italian Coalition Talks Stumble, Raising Risk of Early Elections
Why Italy Is Headed for Yet Another Early Election: QuickTake

--With assistance from John Ainger and Zoe Schneeweiss.

To contact the reporters on this story: John Follain in Rome at jfollain2@bloomberg.net;Alessandro Speciale in Rome at aspeciale@bloomberg.net;Tommaso Ebhardt in Milan at tebhardt@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Richard Bravo, Jerrold Colten

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