Italian assets were pummeled again yesterday on mounting concern over the populist coalition’s fiscal plans, with the moves rippling across European debt markets. Bond yields climbed to the highest levels in almost three years, while the premium to cover a default in Italy’s debt was the stiffest since October.
The benchmark stock index dropped for a second day, while the euro weakened to its lowest level this year as investors fret that the anti-establishment parties’ proposal to issue short-term credit notes known as ‘mini-bots’ will lead to increased borrowing in what is already one of Europe’s most indebted economies. After overlooking an inconclusive election result in March, investors are now pushing Italian risk premiums higher.
Bond yields surged last week on concern that the populist parties would seek a debt writedown, which has now been accentuated by fears of what mini-bots mean for the third-biggest economy in the eurozone.
“The market will remain on somewhat of a knife edge as regards the intended plans and as the coalition government itself evolves,” Rabobank strategists led by Richard McGuire wrote in a note. Italy’s 10-year bonds rose 12 basis points to 2.35%. The Ftse MIB index of shares in Milan traded 1.6% down, after falling up to 2.1%. The cost of protecting against defaults on Italian bank and insurance senior debt has risen to the highest since August 2017.
Much of the selling stemmed from the supposed proposals to assess the feasibility of issuing small, euro-denominated treasury bills, according to traders. The move is seen by some as a step toward a parallel currency. Fitch Ratings said the coalition’s programme would increase the general government deficit and raises risk to the country’s sovereign credit profile.
“What is seen as a de facto parallel currency would be a major negative development for the euro should any new Italian government seek to pursue it,” said Viraj Patel at ING in London.
However, Capital Economics in London said it was sceptical that Italian politics would weigh on the euro.
“With an imminent push for Italy to leave the currency bloc unlikely, we suspect the prospects for US and eurozone economic growth and monetary policy will remain the key drivers of dollar-euro for the time being,” it said.