Italy has the second highest public debt in the eurozone.
Italian far-right leader Matteo Salvini launched a broadside at the European Union as he closed in on a coalition government deal with the anti-establishment Five Star Movement on Wednesday, saying that he would rather be a "barbarian than a slave" to Brussels.
Also, a draft coalition program was leaked yesterday where the coalition planned to ask the European Central Bank to forgive 250 billion euros ($296 billion) of Italian debt purchased under the euro zone central bank's quantitative easing (QE) program - sending Italy's benchmarks down by 2.5 percent and Italy's borrowing costs higher.
The League and 5-Star have held a week of talks aimed at putting together a coalition government and ending more than 10 weeks of political stalemate following an inconclusive election on March 4.
Five Star became the single biggest party.
The shocking report, which outlines demands for the European Union to write off Italian debt amounting to €250 billion (£220 billion), comes as Lega leader Matteo Salvini said Italians will no longer be "slaves" to the EU.
"First must come the things that need doing, and only afterwards (we need worry about) absurd rules written many years ago when the world was totally different", he said. Five Star would put the pact to an online vote of its members and The League says it will take the deal to the streets. The sanctions have had a major knock-on effect on the Italian economy, as Russia is a top importer of Italian products and one of the top European tourist destinations for Russian travellers.
Once fiercely Eurosceptic, the 5-Star has softened its stance in recent months, looking to reassure financial investors that it is fiscally responsible.
The League has promised to introduce a flat tax rate of 15%, which would tax revenues by some 80 billion euros (RM376 billion) per year, while 5-Star has pledged new welfare payments for the poor costed at around 17 billion euros (RM80 billion). "Only then will they release around 60 million hostages".
The report spooked markets even though the League's economic spokesman told Reuters that debt cancellation was never in an official draft of a government programme.
"This is the time to have the courage to go all the way", he said, promising measures including tougher penalties for tax evaders and cuts to the so-called "golden pensions" enjoyed by wealthy former politicians and business executives.
"I think that this evening we will close the contract", Di Maio said.
How is this going down in Brussels?This would lower Italy's public debt, now at 130% of national output.
Another commissioner, Dimitris Avramopoulos, was also quoted on Tuesday as weighing in on Italian politics, saying he hoped the new government maintained current immigration policies.
The spread narrowed back to 137 bps after the League's comments on debt forgiveness.
M5S leader Luigi Di Maio and his Lega counterpart, Matteo Salvini, both claim that the two parties are no longer pushing for an Italian exit from the Eurozone.
"They are preparing excuses if they can not maintain all their promises, so they want to unleash a battle against the European Union", said Andrea Romano, a lawmaker from the centre-left Democratic party.
The United States and China start trade talks on Thursday meant to avert a damaging tariff war, with the White House's harshest China critic relegated to a supporting role, senior Trump administration officials said on Wednesday. However, three 5-Star sources said the main stumbling point remained who should head the administration. Sterling bucked the trend, rallying against both the dollar and the euro after a United Kingdom newspaper reported that Prime Minister May would tell Brussels that Britain was prepared to stay in the European Union's customs union after a transitional arrangement beyond 2021.