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Italy's new government must seize opportunity of historically low borrowing costs, ex-finance minister says

Key Points
  • Markets have cheered the incoming coalition and the prospect of smoother relations with the EU.
  • Matteo Salvini, a former deputy prime minister and leader of the Lega party, called for a snap election earlier in August.
  • Opinion polls suggest Lega is the most popular party in the country and political experts are eagerly anticipating Salvini's next move.
Italy's Prime Minister Giuseppe Conte reviews the guard of honour at Chigi palace in Rome, Italy, June 1, 2018.
Alessandro Bianchi | Reuters

Italy's 67th government since World War II now has a unique opportunity to invest in and grow the country as borrowing costs have dropped to such low levels, according to a former finance minister.

Pier Carlo Padoan, a member of the Democratic Party (PD), told CNBC's Steve Sedgwick that the new government now had to grasp this unique environment in the country's sovereign debt markets.

"The boost of having this new government coming from financial markets — the spread has fallen down to unprecedented levels and the interest rate is historically low — so there are very good starting conditions," he said at the Ambrosetti Forum in Italy Friday.

"It's up to the government now to transform this nice opportunity into a reality. And there is an ambitious program which is a medium-term program. This is good and it's giving a new horizon to the economy which we need, because the problem is of course to maintain financial stability and discipline in public finance but also boost growth once again," he added.

Markets have cheered the incoming coalition and the prospect of smoother relations with the EU. Italian bonds have rallied hard this week, and the yield on the 10-year benchmark bond has fallen below 1% — a dip from around 3.5% toward the end of last year. Bond yields move inversely to prices.

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The difference between Italian and German bond yields — used by some traders as a fear gauge in Europe — has also dropped to low levels. The fall in yields means that borrowing costs for the heavily-indebted Italian government are at more attractive levels and investors are more willing to lend to the country.

"Italy needs to take it," Padoan tod CNBC. "This time it is absolutely necessary that this window of opportunity is exploited," he added.

Enrico Letta, a former Italian prime minister who led a grand coalition between 2013 to 2014, told CNBC, "Italian problems are still there even if the spread is in good shape today ... Italian problems are long-term problems, structural problems," he said at the same event, mentioning the next budget and the negotiations with the EU.

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Longtime animosity between the Five Star Movement (M5S) and the Demcratic Party (PD) was put aside this week as the two made an unlikely alliance to form a coalition government.

The two left-leaning parties take over from a rocky coalition between M5S and the right-wing Lega party — which crumbled last month after coming to power in June 2018.

Matteo Salvini, a former deputy prime minister and leader of the Lega party, called for a snap election earlier in August. He declared the Lega-M5S coalition unworkable and pushed for a no-confidence vote in Prime Minister Giuseppe Conte — which ultimately failed. However, opinion polls suggest Lega is the most popular party in the country and political experts are eagerly anticipating Salvini's next move.

"He (Salvini) was really very dangerous in government but he is very strong in opposition so I think the government has to take note that the situation is now over because we have a new government," Letta said Friday.

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