ROME (REUTERS) - Italy's two anti-establishment parties have signed an accord to form a ruling coalition, promising to ramp up spending and putting the nation on a collision course with the European Union despite watering down some of their most radical proposals.
The "contract" by the League and the 5-Star Movement, the two parties that won the most parliamentary seats in inconclusive elections on March 4, has still to be approved by their memberships, in votes to be concluded by Sunday (May 20).
The document, inked after two months of political stalemate in the euro zone's third-largest economy, calls for billions of euros in tax cuts, additional spending on welfare for the poor and a roll-back of pension reforms.
The final accord dropped a proposal that would have posed the most direct challenge to EU fiscal rules, and sought to assure rattled investors that the government blueprint did not include any plans for an exit from the euro single currency.
An earlier draft of the accord, reviewed by Reuters, had called for the EU to create fiscal headroom for Italy by adjusting the formula used to calculate the nation's debt burden, which the rules say must be reduced.
The final version omitted that proposal but still called for a review of the EU's governance and fiscal rules - setting the stage for the bloc's biggest political challenge since Britain voted to leave two years ago.
The euro sank on the latest developments on Friday and was headed for its fifth straight weekly fall against the dollar, in what would be a first for the currency since 2015.
Italian government bonds lost more ground on Friday, with 10-year yields hitting a seven-month high. Investors are worried that a G7 nation, with a debt burden second only to Greece in the EU, is about to embark on a huge spending spree. Italian shares also lost 1 per cent.
The accord also includes a plan to effectively securitise the debt that the government owes to companies and individuals, creating short-term bonds - IOUs - that can be traded.
Earlier this year, outgoing Economy Minister Pier Carlo Padoan described the proposal as "a plan to circulate a disguised parallel currency".
"Something must be done to resolve the problem of the public administration debts to taxpayers," the accord said. Claudio Borghi, the League's economic chief who helped write the government plan, told la Verita newspaper that the new securities "could be spent anywhere, to buy anything".