May 25, 2018 / 9:39 AM / 6 months ago

Italian prime minister-designate sees central bank chief

* Conte finalising cabinet team

* Worried markets continue to fall

* Eurosceptic lined up for economy ministry

By Crispian Balmer

ROME, May 25 (Reuters) - Prime Minister-designate Giuseppe Conte met the governor of the Bank of Italy on Friday as markets fell on fears the incoming eurosceptic government will embark on a spending spree that will undermine fragile state finances.

The eurozone’s leading financial risk indicator, the gap between Italian and German sovereign debt yields, pushed out to 200 basis points for the first time in nearly a year, while Italy’s bank stock index hit an 11-month low.

With investor concern growing, Conte was expected to finalise his cabinet team on Friday, but doubts still hung over his likely choice of economy minister — Paolo Savona, who has called Italy’s entry in the euro zone a “historic error”.

Conte, a political novice plucked from obscurity by the anti-establishment 5-Star Movement to head its coalition alliance with the far-right League, made no comment to reporters as he set out for talks with Bank of Italy chief Ignazio Visco.

Outgoing economy minister Pier Carlo Padoan warned Conte not to misjudge the power of the markets.

“The most worrying aspect of the programme which this government is working on is its underestimation of the consequences of certain choices,” Padoan said in an interview published in Il Sole 24 Ore newspaper.

“We worry about Europe, but any infraction proceedings (over excessive deficit spending) take months to develop, while the response of the markets comes in just a few seconds.”

Although Italian financial instruments have come under pressure, there is little sign yet of wider contagion and Italian bond yields remain far below the levels reached during the euro zone debt crisis in 2011 and 2012.

“PLAN B”

The 5-Star and League unveiled their government pact a week ago, following more than 70 days of political deadlock, promising billions of euros in tax cuts, additional spending on welfare for the poor, and a roll-back of pension reforms.

Investors are watching the government formation carefully, especially the choice of economy minister.

Savona, 81, has decades of experience in academia, banking and government but has alarmed markets with his eurosceptic views that chime with those of the anti-immigrant League. A former economy minister has called him “suicidally anti-German”.

In his latest book he calls for a “plan B” to be drawn up to allow Italy to leave the euro zone with as little damage as possible should this prove necessary.

President Mattarella has made it clear he does not want the powerful economy job to go to Savona, but the League and 5-Star have so far shown no sign of wanting to back down.

Both League leader Matteo Salvini and 5-Star chief Luigi Di Maio look certain to enter the cabinet as interior minister and labour minister respectively.

An experienced diplomat was expected to be made foreign minister, but the final choice remained unclear, while security analyst Elisabetta Trenta was in pole position for the defence portfolio.

Conte was expected to present his cabinet list to the head of state later on Friday or on Saturday, opening the way for confidence votes in both houses of parliament next week. (Editing by William Maclean)

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