5-Star, League want European Central Bank to forgive €250 billion of Italy debt

Italy's populist government is still a work in progress

Mattarella urged the parties to instead back a caretaker government that could lead the country until the end of the year and approve the budget.

They said: "The government contract is an old version that has already been extensively modified during the last two meetings".

Both parties in the potential coalition arrangement have agreed to crack down on immigration to Italy, but exactly how and to what extent is believed to be one of the areas still up for agreement.

The leader of Italy's anti-establishment 5-Star Movement took his campaign for a referendum on the euro to Brussels on Wednesday, holding out the prospect of cooperating with other anti-euro parties. Most controversial of all, the draft calls into question the irreversibility of the single currency by suggesting a mechanism to allow member states to leave if voters demand it.

Until now, investors have been relatively calm about the prospect of an alliance between Five Star and the League.

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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.

A plan by Italy's 5-Star Movement and League to ask the European Central Bank to forgive 250 billion euros ($296 billion) of Italian debt was never in an official draft of a government programme, the League's economic spokesman told Reuters.

"The leak is a watershed in the external perception of what an anti-establishment government may mean. It would very much put the new government on a Syriza-like trajectory within Europe", Mr Codogno wrote, referring to the leftwing ruling party in Greece. Italian shares also fell 1.8 per cent on Wednesday.

Matteo Salvini, leader of the anti-mass migration populist Lega, and Luigi Di Maio, leader of the anti-establishment populist Five Star Alliance, have been locked in round after round of talks about forming a new government which has been claimed would be a nightmare scenario for the European Union - but negotiations appear to have stalled. Prime Minister Silvio Berlusconi was toppled in 2011 as a former European Union commissioner and economics professor Mario Monti was installed as his "technocratic" replacement after the Union decided the country had not been run to their satisfaction.

Blunt-talking Matteo Salvini, who heads the right-wing anti-migrant League party, indicated he'd prefer to go to a new election, 10 weeks after a vote yielded political gridlock, if his forces don't get a "free hand to manage the security of Italians". "It is in the tradition of populist nationalists to find external scapegoats".

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