Italy��s two largest antiestablishment parties are ready to present their prime minister candidate to President Sergio Mattarella on Monday, moving one step closer to forming a government that analysts fear could plunge the country into a sovereign debt crisis and threaten the future of the eurozone.
On Sunday, the populist 5 Star Movement and far-right anti-immigrant League party agreed on the main members of their cabinet, including who they��d like to see as prime minister in their coalition government. The name of the proposed prime minister has not been confirmed, but local media point to Giuseppe Conte, a 54-year-year old university professor without much political experience.
Mattarella is expected to confirm the coalition, paving the way for a euroskeptic government to lead the eurozone��s third largest economy.
��The prospect for a new Greek-like crisis but on a larger scale in Italy are rising. An inexperienced and malcontent government appears set to assume office and poses a new potential threat to the euro even if the data improves,�� said strategists at BBH in a note on Monday.
The 5 Star Movement and League already look set on a collision course with the European Union, having promised to challenge Brussels��s budget guidelines and rules on immigration.The two coalition parties have also vowed to increase fiscal spending and cut taxes �� moves some worry could throw the Italian economy into disarray and create a new sovereign debt crisis.
Those concerns have spooked traders in Italian markets. The FTSE MIB stock index I945, -0.92% lost 0.8% to 23,261.22 on Monday, falling in an otherwise upbeat European trading session. That loss comes after the index dropped 2.9% last week for its biggest weekly slump since the week of the election in early March.
The euro EURUSD, -0.0170% �fell to a five-year low around $1.1762, although that slide partly was due to a rising dollar.
In the bond market, traders are also demanding a higher yield to buy Italian paper, an indicator markets are becoming nervous about the country��s financial stability. The yield on 10-year Italian government bonds TMBMKIT-10Y, +4.86% �rose 6 basis points to 2.281% on Monday, while the spread over German bunds rose to its highest level since October last year at 173 basis points, or 1.73 percentage point.
While still far from the danger zone, rising bond yields in Europe revive memories of the Greek debt crisis in 2015. After months of negotiations between Greece��s government and its international creditors, the two sides in July 2015 reached a deal to avert a Greek default. At the time, there were worries that a bankruptcy in Greece could lead to ��Grexit�� �� shorthand for Greece leaving the eurozone �� and eventually spell the end for the entire monetary union.
Moreover, it stirs memories of the worst days of the eurozone debt crisis in 2011 and 2012, when the 2-year Italian yield soared to more than 7%. Yields later retreated, with ECB President Mario Draghi��s 2012 pledge to do ��whatever it takes�� to preserve the euro and the eventual formulation of a never-used program of emergency bond purchases serving to calm fears. Later, the ECB��s introduction of bond buying via its quantitative easing program helped drive yields lower across the eurozone.
The 5 Star Movement and League dialed back euroskeptic rhetoric ahead of the March election and are no longer calling for an Italy referendum on the shared currency. However, their disapproval of EU and ECB fiscal rules are keeping breakup fears alive. Markets reacted last week when a draft proposal on shared power called on Brussels to come up with a plan that would let member countries leave the euro if they so desired, language that was later dropped.
In that vein, France��s economy minister, Bruno Le Maire, warned on Sunday that a failure by Italy to stick to the EU��s financial rules could threaten stability of the entire eurozone monetary union.
��Investors might have not realized it yet but the resolution of the Italian political deadlock with the League and 5 Star Movement parties close to forming a coalition government might not be such a positive development after all,�� said Konstantinos Anthis, head of research at ADS Securities, in a note.
��The formation of a working government would be favorable compared to the lack of political leadership but the agenda of the two parties puts to the question Italy��s future in the European Union,�� he said.
Italy has a long history of political t
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