May 30, 2018 / 5:59 PM / in 3 months

WRAPUP 1-Italy's Cottarelli opens door to possible eurosceptic government

* PM-designate leaves time for parties to form government

* 5-Star would drop eurosceptic finance minister nominee

* League, surging in polls, wants election soon

* Markets calmer after Tuesday’s rout

* Graphic: tmsnrt.rs/2wAaJL2

By Giuseppe Fonte

ROME, May 30 (Reuters) - Italy’s two main anti-establishment parties could yet form a government, after the man nominated as interim prime minister said politicians, rather than technocrats like himself, might be able to steer the country out of deadlock.

Wednesday’s development came as financial markets calmed after a rout a day earlier when investor concerns about Italy’s finances gave the yield on Italian 2-year bonds its biggest rise since 1992 and dented the euro’s exchange rate.

The crisis started when the 5-Star Movement and the right-wing League abandoned their plan to form a coalition after the head of state vetoed their choice of 81-year-old eurosceptic economist Paolo Savona as finance minister.

On Wednesday, Prime Minister-designate Carlo Cottarelli said possibilities had emerged “for the birth of a political government,” and that financial market turmoil and other circumstances, “have caused me to wait for further developments.”

A source close to President Sergio Mattarella, who vetoed Savona as finance minister and appointed Cottarelli to form a government to oversee fresh elections around the end of the year, said the two men had “decided together not to rush things, (to favour) a possible political government”.

A source close to 5-Star, which emerged from inconclusive elections in March the single-biggest party in parliament, said the parties were now trying to find “a point of compromise on another name” for the economy ministry.

Laura Castelli, a lawmaker close to 5-Star leader Luigi Di Maio, said: “It’s surprising that Paolo Savona, a person of great culture and a fine political sense, has not yet taken the decision to withdraw.”

But League leader Matteo Salvini, who is surging in opinion polls, played down the notion that he and 5-Star would try again to form a coalition, saying Italy should have a snap election.

“The earlier we vote the better because it’s the best way to get out of this quagmire and confusion,” he told reporters.

UNCERTAINTY

On Tuesday, the prospect of a snap election - likely to lead to a eurosceptic government that could put Italy’s euro zone membership in question - hit Italian bonds, shares and pushed the euro to multi-month lows.

A surprise breakthrough between the president and 5-Star/League would ease uncertainty but still usher in a coalition planning to ramp up spending in the heavily indebted nation and push for changes to European Union and euro zone fiscal rules.

But even with uncertainty remaining, Italy’s government bond yields fell from multi-year highs on Wednesday and a smooth bond auction brought a degree of calm to a battered market.

“We are not yet at the point where investors refuse to lend money to Italy,” said Roberto Coronado of PineBridge Investments.

In Germany, the euro zone’s largest economy, Finance Minister Olaf Scholz played down the risk of the Italian crisis engulfing the currency area.

“One can say that Europe is better prepared for difficult situations than before. What is more, I am firmly convinced that the majority of Italians have a very pro-European stance. It is a European nation,” he told Reuters.

Three officials at the European Central Bank told Reuters the ECB was not considering any intervention as indicators were not yet showing signs of stress among banks and the central bank did not have the tools or mandate to solve what they said was being treated as essentially a political crisis.

Additional reporting by Steve Scherer, Gavin Jones, Giselda Vagnoni, Steve Jewkes, Dhara Ranasinghe, Helen Reid, Sujata Rao, Marc Jones, Michael Nienaber and Antonio Denti Writing by Robin Pomeroy

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