Italy financial markets plunge on political turmoil

GETTYFive Star Movement's leader Luigi Di Maio called the president's choice'incomprehensible

European capitals watched nervously on Monday and markets tumbled as Carlo Cottarelli stepped forward to head a temporary new Italian government.

Carlo Cottarelli was suggested as a stop-gap replacement, before he failed to present a cabinet and won no support.

5-Star Movement leader Luigi Di Maio and League leader Matteo Salvini came up with a compromise earlier Thursday that led the president to postpone trying to install a technical government until a new election could be held.

A formation of the new government will at least temporarily allay those concerns, because it will - for now - remove the threat that snap elections will be called later this summer, a prospect which anxious investors because it could have bolstered anti-EU parties.

Savona was rejected for the job by the head of state.

Leaders of both parties signaled a willingness to try again late Wednesday.

Financial markets are nervous as Italy faces the prospect of new elections as early as September after a nascent populist government collapsed over the weekend, prolonging nearly three months of uncertainty.

"The Italians would still be a thorn in the side of the eurozone, but the irritation would be long and drawn out at the negotiating tables in Brussels, and markets would recover from the current heightened level of uncertainty".

Stock markets around the world also nosedived at the start of the week but are rallying on Thursday as the prospect of Italy leaving the eurozone appears to recede.

The contract called for heavy spending to introduce a basic income for needy Italians and a two-tier flat tax, as well as pension reforms, but was light on financing details.

In this photo taken on Thursday, April 5, 2018, Italian President Sergio Mattarella addresses journalists at the Quirinale Presidential Palace at the end of the second day of political consultations, in Rome.

"If this new government - Cottarelli's government - goes to chambers and there is an overall "no" vote, then this means that Italy doesn't have a government", according to Giovanni Orsina of the School of Government at Luiss Guido Carli University.

The center-right alliance grouped the League with ex-Premier Silvio Berlusconi's Forza Italia and the smaller right-wing Brothers of Italy.

Seema Shah, global investment strategist at Principal Global Investors, said the demand at the auction was "very encouraging" and "clearly indicates that investors still have faith in the Italian economy, if not the government".

"I am absolutely pro-Europe".

Mattarella said that an openly eurosceptic economy minister was counter to the parties' joint promise to simply "change Europe for the better from an Italian point of view". "But certainly Italy has been pushed a bit to the margins".

"The next elections will be a plebiscite - the population and real life against old political castes and the "lords of the spread", he said.

Last-ditch efforts to form a government in Italy showed little sign of succeeding on Wednesday, with major parties calling instead for repeat elections in July - a vote investors fear could become a de facto referendum on the euro.

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