Italian President Sergio Mattarella is expected to ask a former International Monetary Fund official on Monday to head a stopgap government amidst political and constitutional turmoil, with early elections looking inevitable.
Mattarella summoned Carlo Cottarelli after the anti-establishment Five Star and far-right League parties abandoned plans to form a coalition, angered by the president’s veto of their choice of a eurosceptic to become economy minister. The president was due to meet Cottarelli at 1130 am (0930 GMT).
Financial markets rallied for a while on the news that Italy’s economy, the euro zone’s third-biggest, would not be guided by a government hostile to the single currency.
However, the gains were soon wiped out and analysts warned that any Cottarelli-led government was unlikely to win a confidence vote in parliament, meaning it would serve merely as a caretaker until new elections can be held.
The 5-Star Movement is considering campaigning together with the League if the nation goes back to the polls, a 5-star source said.
The center-right Forza Italia party also said it would not vote in favor of a possible Cottarelli government.
In a televised address, Mattarella said he had rejected the coalition’s candidate for the crucial economy portfolio, 81-year-old Paolo Savona, because the economist had threatened to pull Italy out of the euro zone.
“The uncertainty over our position has alarmed investors and savers both in Italy and abroad,” Mattarella said, adding: “Membership of the euro is a fundamental choice. If we want to discuss it, then we should do so in a serious fashion.
Financial markets tumbled last week on fears the coalition being discussed – a marriage of the League and 5-Star Movement – would unleash a spending splurge and dangerously ramp up Italy’s already huge debt, which is equivalent to more than 1.3 times the nation’s domestic output.
After the coalition’s collapse, Italian bonds and stocks rallied while the euro pulled off more than 6-month lows. The closely-watched premium of Italian 10-year bond yields over their German equivalent – considered one of lowest risk investments in the world – narrowed 12 basis points from Friday’s close at 193.7 bps.
But the rally was short-lived. The euro lost most of its early gains to trade up just 0.1 percent at $1.1666 while Italy’s bank stock index was down as much as 1.7 percent.
Italian 10-year yields turned higher, rising 1 basis point to 2.47 percent. In an auction of two-year zero coupon bonds, Italy paid the highest yield since December 2014.
