Italy’s Unlikely Government Faces Crunch Day as Talks Falter

(Bloomberg) -- Head of state Sergio Mattarella meets with Italy’s main political leaders on Wednesday in a last-ditch bid to carve out a viable majority in parliament, after a day of brinkmanship, finger-pointing and recriminations between the two parties trying to put together a new government.

Mattarella’s second day of consultations features talks with the Democratic Party and the Five Star Movement, long-time rivals now bound by a desire to work together to forestall early elections that would likely be won by Matteo Salvini’s rightist League.

Italy’s Unlikely Government Faces Crunch Day as Talks Falter

The president has set a tight deadline to see if there’s a chance the Democrats and Five Star can reach an agreement on a new coalition, after Salvini knocked the populist government on its head earlier this month in a risky bid to capitalize on voter support and move to early elections.

Direct negotiations between Five Star and the Democrats, or PD, at several junctures on Tuesday appeared to stall on who will hold key cabinet positions. The Democrats are now willing to accept Prime Minister Giuseppe Conte’s return as premier in the new government, a party official said, though they want to limit Five Star leader Luigi Di Maio’s role.

On Tuesday, Italian government bonds had their best day since July 3 in light of the progress made between the parties. The benchmark 10-year yield tumbled 19 basis points to 1.14% -- narrowing the yield premium over German bunds (known as “lo spread” in Italy) to 183 basis points, the least on a closing-market basis since May 2018. The FTSE MIB index of shares climbed 1.5%, with banks among the biggest gainers.

Mattarella, who alone has the power to nominate a new leader, will want a definitive answer Wednesday on the two parties’ success or failure in reaching a deal. He will then either appoint a new premier or dissolve parliament, setting up elections that could come as early as November.

Here are the main players Mattarella will meet with on Wednesday, and what’s at stake:

Democratic Party: 4 p.m.

Luigi Di Maio’s Five Star Movement swept to victory in the March 2018 general elections after hammering away at Italy’s corrupt, entitled political class, saving its harshest rhetoric for the Democrats, or PD, at the time the governing party.

Italy’s Unlikely Government Faces Crunch Day as Talks Falter

Now, the PD and Five Star are in contact to see if they can come up with a common program to govern, preventing elections and holding off Salvini’s power grab. Talks Monday evening were constructive and focused on the future government’s program, said Five Star’s Stefano Patuanelli.

Sticking point: the Democrats want any new administration to be a clean break from the past government. And while they appear to agree that Conte, who’s also received the endorsement of President Donald Trump, can stay on to lead a PD-Five Star coalition, they’ll want other signs of “discontinuity,” including changes to a number of powerful ministries.

In a sign that will relieve jittery investors, a new Five Star-PD government would seek to keep Italy’s deficit relative to gross domestic product in the 2020 budget within European Union limits, according to three officials who asked not to be named discussing confidential plans.

The parties would seek to avoid a clash with the EU over spending plans, the officials said, with a deficit-to-GDP ratio under 3%. The outgoing Five Star-League government has clashed with the European Commission, the bloc’s executive arm, over previous spending plans.

Forza Italia: 5 p.m.

Even though Salvini left Forza Italia and its founder, ex-Premier Silvio Berlusconi, out in the cold when he joined the populist coalition with Five Star, FI is part of some alliances at local level along with the League.

Berlusconi said last week that a PD-Five Star government wouldn’t reflect the will of Italian voters, calling for either a center-right bloc or snap elections.

As always, Berlusconi will relish his time in the spotlight, even if it’s only as a wild card this time around.

League: 6 p.m.

There’s a growing sense that, in bringing the populist government down, Salvini misplayed a winning hand. If the PD-Five Star alliance moves forward, his dream of cashing in on the League’s popularity through new elections will be dashed, at least for now.

The League leader is reportedly back in touch with Di Maio, dangling an about-face plan that would return their populist government to power. Still, most see that as a long shot.

Salvini’s main hope is that PD-Five Star doesn’t fly, and that the president then calls for a new vote. While polls show the League has lost some ground since Salvini pulled the plug on the coalition earlier this month, it’s still the country’s most popular party. Meanwhile, Salvini continues in campaign mode, saying the League is ready with a “historic” budget full of fresh spending in the event of a new election.

Five Star Movement: 7 p.m.

Depending on who you talk to, Five Star either holds all the cards or has the most to lose.

While Di Maio’s party has taken talks with the Democrats to the brink, holding firm on its insistence that the PD accept a “Conte II” government, it’s Five Star that may fear an election more than anyone else. In the end, the choice will be in the hands of the party’s activists, who will hold an online vote on the tie-up with the PD.

The upstart party pulled off a huge win in the March 2018 national vote, becoming the top force in parliament, only to see its support cut in half in European elections just over a year later. Di Maio’s group has fared slightly better in polls more recently, but it would still finish third behind the League and the Democrats.

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