Italian debt market issues warning as Draghi government falters
Investors are demanding a higher premium for holding Italian debt after Prime Minister Mario Draghi offered to resign in response to a major rift with a key voter in his cross-party national unity government.
Draghi’s resignation was rejected by the country’s president on Thursday evening, sparking uncertainty over whether the former head of the European Central Bank will remain in office or whether a snap election is imminent.
The prime minister is due to address parliament next Wednesday.
Amid political turmoil, Italy’s 10-year borrowing cost spread over Germany, seen as a key measure of risk, hit a one-month high on Friday morning. The spread widened as German Bunds, a regional safe haven asset, rallied sharply, pushing yields lower.
The widening Italy-Germany gap – which reached 2.19 percentage points on Friday morning – underscores growing investor concerns over politics in Rome at a time when the country is also facing growing economic risks .
The ECB is expected to raise interest rates on Thursday for the first time in a decade. The prospect of higher borrowing costs has raised concerns about the so-called risk of fragmentation in the eurozone – a divergence in the yields of heavily indebted southern European economies with their northern counterparts.
The spread still remains below the highs reached in June before the ECB announced it was working on an “anti-fragmentation” program, but Rabobank analysts said Italian spreads have now entered “the “danger zone” of 2-2.5 percentage points that has prompted verbal interventions from the ECB in the past.
Italy’s political crisis erupted on Thursday after the populist Five Star party boycotted a parliamentary vote on a 26 billion euro package to help families hit by rising food and energy prices.
Although the measure passed parliament with a comfortable majority, Draghi has always said he was only willing to lead a broad, multi-party national unity government to secure support for an economic and social reform agenda. designed to boost Italy’s long-term growth. path.
Italy has pledged to implement the reform agenda in order to access its €200 billion share of the EU’s €750 billion Covid recovery fund. Raising Italy’s long-term growth trajectory is also essential to ensure the sustainability of its public debt, which represents more than 150% of its GDP.
“Draghi’s departure from the political scene and early elections would be clearly negative for Italy and the EU,” said Ludovico Sapio, economist at Barclays. He added that Italy would not benefit from the ECB’s anti-fragmentation tool “if its financial conditions deteriorate due to political developments”.
Members of the Italian business community are also dismayed by the developments, which come at a time when the country’s economic outlook has darkened due to the fallout from the war with Ukraine.
The next elections in Italy are scheduled for the spring, but early elections, following a collapse of the government, would complicate the preparation of the new budget in the fall.
“Regardless of internal disagreements, unplugging a government that was at the end of its rope is simply absurd from a business perspective,” said a Milan-based chief executive who spoke on condition of anonymity.