Published: Thu, May 17, 2018
Worldwide | By Gretchen Simon

Euro hampered by Italian political risk; Asian shares ease

Euro hampered by Italian political risk; Asian shares ease

Italy's election in March left Matteo Salvini's nationalist League, and the anti-establishment Five Star Movement (M5S) under Luigi Di Maio, in the driving seat to form a coalition.

"We have made a lot of good progress. we should finish the program today", Salvini said during a live video stream on Facebook.

"It would be insane to give up at the moment of truth", he said, adding that he would not be intimidated by negative reaction from financial markets or attacks from the media against the two anti-system parties.

"I think the most likely thing is something along the lines of a political cataclysmic event like Brexit", Stiglitz said at the time.

Markets were also unfazed by Italian politics with the bigger focus being a rocketing dollar and rising United States borrowing costs, which have spooked investors in recent weeks and intensified concern about damage to global demand, squeezing emerging markets.

The parties said on Tuesday they want to "re-think" the euro zone's fiscal rules with Italy's partners "in the spirit of returning to the pre-Maastricht set-up" - a reference to the treaty which laid the groundwork for monetary union. Di Maio and Salvini are expected to report back to him with their plans.

European Central Bank data shows that cumulative government bond purchases in Italy, one of the bloc's biggest bond markets, are among the highest in the region.

Fed up with the country's long, seemingly irreversible economic decline, persistent high unemployment and a refugee and migrant crisis, Italy's voters turned on the political centre that has governed (or failed to govern) Italy since the 1980s.

The opposition Democrats have warned that the League's vow to drastically lower taxes to a flat 15-percent rate and the 5-Stars' promise of subsidies to the poor will drastically drive up government borrowing.

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European Union leaders meeting in Sofia on Wednesday are likely to be concerned about the rhetoric coming from the parties that could form a new Italian government as early as next week.

Salvini and Di Maio have both agreed to drop their own ambitions to be prime minister and are looking for a candidate from outside their parties to enact their program.

Italy's relatively high yields at a time of generally low financial market volatility make Italian bonds more attractive on a risk-adjusted basis for many investors.

Another commissioner, Dimitris Avramopoulos, was also quoted on Tuesday as weighing in on Italian politics, saying he hoped the new government maintained current immigration policies.

Luigi Di Maio of the anti-establishment Five Star Movement and Matteo Salvini of the anti-immigrant League met on Thursday morning to review sections on the European Union, deficit spending, a flat tax and immigration, a Five Star official said.

Both groups have a history of euroscepticism.

In a meeting with Mattarella on Monday, 5-Star proposed little-known law professor Giuseppe Conte, but the League has not yet given its go-ahead, a source in the president's office said.

A 39-page document agreed to Wednesday night drops the writeoff demand but says that euro-area government bonds already purchased by the European Central Bank under quantitative easing should not count towards the debt-to-gross domestic product ratio, according to the Five Star official. Each party plans to consult its supporters over the weekend to see if they back the nascent government pact.

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