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Coalition deal to put Italy on collision course with EU

Italian bonds and shares fell as the populist Five Star Movement agreed to a draft government program with the far-right League, which included slashing taxes, a basic income for the poor and a call to renegotiate European Union fiscal treaties.

Yields on benchmark 10-year governments bonds had risen 8 basis points to 2.196% by 4:55 a.m. ET, and the FTSE MIB share index slid more than 1%.

The policy program, on which Five Star members will vote May 18, proposes slashing income tax, with a top rate of 20% and a lower 15% rate. It promises to roll back increases in value-added tax and cut excise duties on petrol and to pay a basic income of €780 per person per month to those in need. EU treaties setting debt limits should be renegotiated, it said.

The parties intend to create a state investment bank and push banks to split their investment and retail banking activities. Banca Monte dei Paschi di Siena SpA would be reorganized to focus on providing credit to the economy.

Claudio Borghi, economic spokesman for the League, told Reuters on May 17 that the party intends to keep Monte dei Paschi in public hands and to roll back planned branch closures. He added that the League might seek to replace Monte dei Paschi CEO Marco Morelli, who said when asked about the potential changes that "shareholders, and especially the most important one, are free to make all the decisions they deem opportune on governance," according to the report.

Monde dei Paschi's shares fell nearly 3% following the agreement, extending losses for a second day after closing 8.9% lower May 17.

Five Star and the League also want to deport 500,000 illegal immigrants, the agreement showed.

Earlier proposals for a referendum on membership of the euro and for the European Central Bank to cancel €250 billion of Italian public debt are not mentioned.

Five Star leader Luigi Di Maio called on party members to support the deal in an online vote that is expected to run through the evening of May 18.

If the parties receive broad support in informal ballots planned over the next three days, the coalition government could take office as early as next week. However, they still need to agree on a prime minister and receive the backing of President Sergio Mattarella.