As Italy Seeks to Form a Government, Leaked Documents Stir Anxiety

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The parties' leaders, Luigi Di Maio of M5S and Matteo Salvini of the League (who counts the likes of Marine Le Pen and Viktor Orbán as his allies), were quick to say this leak was premature, and a later version of their contract showed the section on Europe had been much watered down.

The League and 5-Star have held a week of talks aimed at putting together a coalition government and ending more than 10 weeks of political stalemate following an inconclusive election on March 4. Leaked drafts of their government "contract" include provision for a "conciliation committee" to settle expected disagreements.

Italy's two populist leaders have brushed off fears in Brussels and the markets over the outlines of their possible government. The euro fell to a five-week low against the dollar, and Italy's benchmark 10-year bond was set for its biggest one-day gain since July of last year.

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.

Di Maio shrugged off such warnings as the protests of "Eurocrats that nobody elected", while on Wednesday Salvini, attacked European Union commissioner Dimitris Avramopolous' request that Italy's new government not change its policy on migration.

The head of state has made it clear that he will only look at the definitive version of the text, after a draft leaked earlier this week caused consternation with proposals that would allow Italy to leave the euro, demand financial concessions from the European Union and withdraw sanctions on Russian Federation. The bloc's budget rules require it to cut the debt pile aggressively under the "fiscal compact", which both parties want scrapped.

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"If the market continues to trade off US yields and diverging economic data between the USA and European Union, it's hard to argue against the current direction in yields or the dollar", Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore, said in a note. The text confirms that both parties want an "immediate withdrawal" of European Union sanctions against Russian Federation, to which both parties have grown close.

European Commission President Jean-Claude Juncker and German Foreign Minister Heiko Maas agreed on Friday to use the already available options to circumvent the required EU member states' unanimity when it comes to addressing foreign challenges including the Syrian war.

Both parties have a history of Euroscepticism.

Betway's Alan Alger said: "The draft plans from Five Star and The League will have put Brussels on red alert".

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.

It is still far from clear whether Five Star and the League are prepared to go all the way - and in fact the bluster on the euro may simply be the product of a political compromise in their negotiations that will never translate into policy. Each party plans to consult its supporters over the weekend to see if they back the nascent government pact.