Italian debt selling intensifies after Mario Draghi resigns

The sell-off in Italy’s financial markets intensified on Thursday following the resignation of Prime Minister Mario Draghi, sparking fresh concerns about the future of the country’s heavily indebted economy.

Rome’s 10-year government bond yield jumped 0.18 percentage points to 3.57% as Draghi’s national unity coalition crumbled. Bond yields rise as their prices fall.

Thursday’s moves took the spread between Italian and German benchmark 10-year yields – a closely watched indicator of market stress – to around 2.3 percentage points, reflecting a widening of around 0.3 percentage point. percentage in just two days.

Draghi tendered his resignation to President Sergio Mattarella on Thursday morning, after winning a vote of confidence on Wednesday night but losing support from his coalition members. Mattarella is now expected to dissolve parliament and announce snap elections.

Italy’s debt turmoil on Thursday put pressure on other eurozone bond markets, with Greek, Spanish and Portuguese yields also rising.

A FTSE gauge of Italian stocks slipped 2%. The country’s biggest banks, which are large holders of Italian debt, led the declines, with Intesa Sanpaolo and UniCredit each down more than 6%.

The sale of Italian debt has raised the stakes for the European Central Bank as it prepares to raise interest rates at its policy meeting on Thursday for the first time since 2011. Economists widely expect the central bank is raising borrowing costs by 0.25 percentage points from their current level of minus 0.5%, but pricing officials were also set to discuss a possible hike of 0, 5 percentage points.

Analysts also expected the ECB to shed light on an “anti-fragmentation” tool aimed at limiting the divergence in borrowing costs between the strongest and weakest countries in the eurozone – a challenge accentuated Thursday by the widening of the Italian yield spread.

Ludovico Sapio, macro research associate at Barclays, said “Draghi’s departure from the political scene and the early elections are clearly negative for Italy and the EU”, adding that it will “complicate the design and use potential of [ECB’s] anti-fragmentation tool”.

Kiran Ganesh, global head of investment communications at UBS, said: “Markets want something that will control Italian bond spreads that are going straight higher.”

The euro gained 0.3% against the dollar to $1.02, after falling last week to parity with the US currency for the first time in 20 years.

Elsewhere, Russia resumed its gas supply to Europe on Thursday via the critical Nord Stream 1 pipeline, after a 10-day maintenance period.

However, this was not enough to reassure equity markets, with the regional Stoxx Europe 600 losing 0.2%. In Asia, Hong Kong’s Hang Seng index fell 1.5%.

Wall Street S&P 500 futures were down 0.2%. The broad gauge had closed up 0.6% on Wednesday, with the tech-heavy Nasdaq Composite closing up 1.6% after Netflix revealed it had lost fewer subscribers than expected, pulling other platforms streaming up.

Julio V. Miller