(Bloomberg) -- Italy sank deeper into political uncertainty as populist leaders pulled the plug on their attempt to form a government after the president rejected their choice of a euro-skeptic, Germany-bashing candidate as finance minister.
The anti-establishment Five Star Movement said it was considering proposing impeachment of President Sergio Mattarella, while anti-immigrant League leader Matteo Salvini hinted at a conspiracy and made a thinly veiled call for fresh elections. The euro rallied against the dollar.
Five Star leader Luigi Di Maio blamed credit-rating companies for torpedoing the cabinet.
“Let’s be clear then, what’s the point of going to vote since governments are decided by the credit-rating agencies and the financial lobbies,” Di Maio said on his Facebook (NASDAQ:FB) page. On Friday, Moody’s put Italy’s credit rating on review for a possible downgrade citing risks to its fiscal strength from the government plan put forward by Di Maio and Salvini.
Mattarella said he rejected the populists’ choice of Paolo Savona for finance minister for the good of the country and the financial “savings of families” that had been endangered by rising bond spreads and market concerns.
The euro strengthened 0.5 percent against the dollar, buying $1.1706 at 10:10 a.m. in Tokyo. The common currency has dropped for six straight weeks amid the political uncertainty.
Euro Rally
“This euro rally all seems to be driven by the news that Italy’s president had rejected Paolo Savona as finance minister and that Five Star has effectively withdrawn from the effort to form a coalition government,” said Ray Attrill, head of foreign-exchange strategy at National Australia Bank Ltd. in Sydney.
“We may now be in for an extended period of heightened uncertainty ahead of fresh elections -- assuming that’s where we’re headed -- but that’s not a story for today,” he said. “For now it’s more relief that Italy will not -- for now at least -- have an avowed eurosceptic finance minister.”
The president summoned Carlo Cottarelli, a former executive director of the International Monetary Fund, to his office on Monday, a state official said. Cottarelli may be asked to try to form an interim government before the country heads to early elections, according to television broadcaster RAI.
Five Star leaders are discussing a possible attempt to seek Mattarella’s impeachment, invoking a constitutional clause which says the president is not responsible for actions carried out as part of his office, except for high treason or for violating the constitution, a Five Star official said. Mattarella’s office declined to comment on the report.
‘Stronger Populist Sentiment’
“Mattarella’s choice delays risk but may lead to stronger populist sentiment at the next elections, which is worrisome,” said Rosamaria Bitetti, lecturer in public policy at Rome’s Luiss University. “People voted for these parties and it may be hard to explain to them why they can’t have their government.”
A government plan by the Five Star’s Di Maio and Salvini of the League had spooked European Union partners and financial markets with pledges for fiscal expansion and tax cuts challenging EU budget rules. The Italy-Germany 10-year yield spread reached the widest since 2014 on Friday.
Both men have vowed to vote against a so-called technocratic or non-partisan government, if such a coalition comes to a confidence vote in parliament.
“I agreed to all the ministers except the finance minister,” Mattarella told reporters at the presidential palace in Rome. “I asked for a figure who would mean not risking an exit from the euro.” Mattarella added: “Now some political forces are asking me to hold elections. I will take decisions on the basis of how the situation evolves in parliament.”
Both Salvini and Di Maio had staunchly backed Savona, and pressed Mattarella regarding the proposed government team in separate meetings with the head of state earlier on Sunday afternoon.
“We worked for weeks, day and night, to ensure the birth of a government which defends the interests of Italian citizens. But someone (under pressure from whom?) said no to us,” Salvini wrote in a Facebook post. “At this point, with the honesty, coherence and courage of always, you must now have a say,” Salvini added in a call for early elections.
(Updates with analyst comment.)
