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Italy's Populists Drop Debt Writeoff in Plan for Government

Italy's Populists Drop Debt Writeoff in Plan for Government

  • Five Star, League agree on tax cuts, EU treaties review
  • Di Maio and Salvini are meeting on program, government posts
Carlo Cottarelli, formerly of the IMF, says the plan is "quite worrisome."

Italy’s populist parties say they have virtually completed a government program which has dropped a request for a 250-billion-euro writeoff from the European Central Bank and pledges tax cuts, pension reform and a review of European Union treaties.

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 EU, deficit spending, a flat tax and immigration, a Five Star official said. They will also discuss the premiership and ministers’ jobs, the official added.

A 39-page document agreed to Wednesday night drops the writeoff demand but says that euro-area government bonds already purchased by the ECB under quantitative easing should not count towards the debt-to-gross domestic product ratio, according to the Five Star official. The official confirmed an earlier report by newspaper Corriere della Sera.

The draft includes a pledge to review European treaties but makes no reference to the euro. It also calls for a review of Italy’s contribution to the EU budget with the goal of “making it compatible” with the government’s economic and fiscal plans.

Bond Scare

The threat of a writeoff and an aggressive public spending spree by the new government unsettled bond markets on Wednesday with the spread between Italy’s 10-year bonds and equivalent German bonds widening to 151 basis points, the most since January. The spread narrowed Thursday and was at 150 basis points as of 10:46 a.m. in London. The euro was little changed at $1.1801.

Carlo Cottarelli, a former executive director at the International Monetary Fund, told Bloomberg Television’s Francine Lacqua he saw “quite worrisome” aspects in the plan “like the idea if Italy has to grow more, it probably needs higher deficit, and that is going to be conflicting with the European rules as our deficit is supposed to decline, not just stay at the current level.”

The document calls for a review of European “bail-in” rules for the banking industry to ensure savers are more protected. Small shareholders should also be entitled to partial reimbursements when lenders fold, it says.

The draft plan also pledges a “citizen’s income” for the poor to be proposed in 2019 -- Five Star’s flagship measure - as well as scrapping a previous pension reform which raised the retirement age and stabilized the country’s public debt pile during the crisis. Other points include tax cuts with two rates at 15 and 20 percent, “immediate withdrawal” of sanctions against Russia, and strong curbs on immigration.

More than two months after Italy’s inconclusive election on March 4, the two sides have repeatedly blown through deadlines set by President Sergio Mattarella as they try to find a deal. Di Maio and Salvini have yet to say who will be prime minister. Italian newspapers said that Di Maio was seeking the premiership for himself.

Online Vote

Matteo Salvini

Photographer: Alessia Pierdomenico/Bloomberg

Both Salvini and Di Maio have said they want their voters to have a say on the joint government program they’ve drafted. Once they present it, Di Maio promised an online vote, while the League wants to set up ballots in piazzas across the country.

If voters back the two leader’s efforts the ball will go back into President Mattarella’s court. Di Maio and Salvini are expected to report back to him with their plans. The 76-year-old head of state, a former constitutional court judge, has signaled he could play an interventionist role in vetting their policy plans, as well as their candidates for the premiership and ministerial posts.

Mattarella has been concerned about the impact of the populists’ pledges on fiscal and foreign policy since Salvini’s center-right alliance and Five Star emerged as the biggest groups from the inconclusive March 4 election.

Should Di Maio and Salvini’s efforts fail in the final stretch, Mattarella may revert to an earlier plan to appoint a non-partisan premier, though both leaders have said they’ll use their blocking majority to shoot down any such candidate and trigger new elections.

— With assistance by Chiara Vasarri, Chiara Albanese, John Ainger, Sonia Sirletti, and Kevin Costelloe

(Adds Cottarelli, bail-in rules from sixth paragraph.)