Italian populists seal coalition pact in challenge to European Union elites

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The anti-establishment 5-Star Movement and the far-right League party plan to ask the European Central Bank to forgive the debt, according to a draft the parties are working on, the Huffington Post Italia website reported late Tuesday.

The euro gave up gains and fell 0.2 percent to $1.1778 after the Italian parties outlined their economic plans.

Anti-establishment 5-Star Movement leader Luigi Di Maio speaks following a talk with Italian President Sergio Mattarella at the Quirinal Palace in Rome, Italy, April 12, 2018.

Among other policies yet to be approved as of Tuesday evening were also whether asylum centres should "fully respect" migrants' human rights, and the radical proposal to have just two tax brackets - 20 percent and 15 percent.

The rise in bond rates, the dollar and oil "is being driven by the same backdrop, which is the US economy is hitting on all cylinders", Todd added.

Italian bond yields and the cost of insuring Italy's debt against default jumped on the news even after Claudio Borghi, the League's economics chief, told Reuters the request for debt forgiveness was never in an official draft of their programme.

Nicola Nobile, economist at Oxford Economics, said the coalition's policies might produce a short-term bounce in growth to 3 percent in 2019 and 2 percent in 2020, versus a baseline of around 1 percent for both years.

Italy's borrowing costs have been rising as details of the accord emerge, though they stabilized after a sell-off on Wednesday.

US 10-year Treasury yields rose, extending this week's bond market selloff, as traders and investors have not reached a consensus on whether it was time to buy or if the market was vulnerable to more selling.

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At a business forum on the shore of Lake Como in September past year the leaders of Italy's soaring populist parties brushed off suggestions that they wanted to lead their country out of the euro.

They also share an anti-establishment sentiment that has taken root in Italy but which has worldwide parallels such as Britain's vote to leave the European Union and the USA election of President Donald Trump.

Joerg Kraemer, from Germany's Commerzbank, said: "Such an Italian government would appear irresponsible in fiscal policy terms and further reduce the willingness of many voters in the north of the eurozone to support Macron's plans for more redistribution of risks and income".

It would also for the first time mean rules on how a sovereign debt restructuring in the euro zone would be carried out.

The sustainability of M5S-League reforms is in doubt, as Italy has one of the highest public debts in the world. Under current European Union and Italian legal frameworks, most of the demands would prove hard, or impossible, to carry out.

Officials said that Italy's huge public debt was now effectively subsidized by the ECB's bond-buying program.

But that relaxed attitude could change if a populist government in Rome were to start a serious attempt to implement its vision for a return to the pre-Maastricht days. The contract contains a proposed "conciliation committee", a structure parallel to the parliament which would be responsible for settling any disagreements between two political forces that have diverging ideas on issues like immigration and Italy's relations with Europe.

"A crisis is not likely in the next 12-18 months, but once the European Central Bank starts to tighten, I would get anxious", the second official said.

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