Italy’s coalition proposals rattle banking shares

Italy’s two anti-system parties’ progress to form a coalition and free up billions for tax cuts and welfare scared off investors and hit the Milan bourse.

Five Star leader Luigi Di Maio and anti-immigrant League chief Matteo Salvini were entering the final stages of days-long talks to share out cabinet responsibilities.

Matteo Salvini

Italian banks, which are seen as a proxy for political risk in the country due to notably to their government bond holdings, fell as borrowing costs jumped.

Italy already has a debt pile worth more than 130% of its annual output and the parties’ pledge to introduce a flat tax rate of 15%, new welfare payments and scrap an unpopular pension reform are likely to strain the country’s finances.

League economic adviser Claudio Borghi told reporters there is no proposal to cancel part of Italy’s debt in the draft programme.

He said there is “simply the request for a change in accounting rules” so that securities bought by the ECB would not impact the debt-GDP ratio, adding the request would apply to all EU countries.

Italian yields came off their highs of the day after Mr Borghi’s comments, though the 10-year government bond yield remained above 2%, leaving the spread over German bunds at 146 basis points.

Earlier however, fellow-League lawmaker Armando Siri in a television interview said they are discussing a €250bn ECB write-off. The ECB is barred from directly financing governments under the Maastricht Treaty.

An ECB spokesman declined to comment.

Mr Salvini was dismissive of investors’ concerns, reminding supporters of how a market selloff help unseat his centre-right ally Silvio Berlusconi during the financial crisis.

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