Odds slashed for Italy to be next country to leave EU

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Some of the other items still in red in that version include parts of a hardline immigration policy that would see Italy increase detentions of undocumented immigrants and speed up deportations.

Italy's new government, likely to be formally confirmed within the next few days, sets a perilous precedent for Brussels: it marks the first time a founding member of the European Union has been led by populist, anti-EU forces.

More than two months after Italy's inconclusive election on March 4, the two sides have repeatedly blown through deadlines set by President Sergio Mattarella as they try to find a deal. The top two finishers - the upstart anti-establishment 5-Star Movement and the nationalist League party - have been inching this week toward an alliance that would have a razor-thin majority in Italy's parliament.

Right-wing League leader Matteo Salvini attacked "unacceptable interference from the EU" while Luigi Di Maio, of the anti-establishment Five Star Movement, spoke of "continuous attacks. from Eurocrats". Now they say they will try and reform the European Union from within.

With the bond markets rattled and much of Europe watching anxiously, the two principals sounded increasingly defiant as they insisted Wednesday that a coalition deal was close.

Mr. Salvini, speaking on Facebook live, relished the angst. "I think investors are recognising we are at the beginning of the beginning of this, so it's not anything to make dramatic portfolio moves or any significant bets on", said Katie Nixon, chief investment officer for the wealth management division of Northern Trust in Chicago.

The "Contract for the Government of Change" being drafted by the League and Five Star was described as a "bomb" to the political order by Di Maio on Tuesday.

Mattarella has said if political leaders can't form a coalition he'll appoint a non-political person to lead Italy to an early election by year's end. In recent days, Mr Salvini has been trying to push Mr Di Maio towards a more confrontational attitude with regard to Brussels on everything from the single currency to budget rules and migration policy.

Among the key disputes still in question are specifics of what could be a $120 billion spending spree, including proposals for a flat income tax, an automatic basic income for all Italians and more generous pensions.

An incendiary early version of their accord called for the renegotiation of European Union treaties, the creation of a euro opt-out mechanism, a reduction in Italy's contribution to the European Union budget and the cancellation of €250bn of Italian government debt.

The emerging M5S-Lega coalition government is also demanding a revision of the Dublin rules that call for migrants to apply for asylum in the country of entry, while that await a decision on a possible resettlement. Italian bond yields and the cost of insuring Italy's debt against default jumped on the news even after Claudio Borghi, the League's economics chief, told Reuters the request for debt forgiveness was never in an official draft of their programme.

Italy's 10-year bond yield rose 0.06 percentage points in morning trading as investors retreated from the country's debt - yet they remained below pre-election levels, when a Five Star-League coalition was an unlikely scenario.

Each party plans to consult its supporters over the weekend to see if they back the nascent government pact.