Italian markets rally after finance minister Giovanni Tria made assurances that the eurozone’s third-largest economy would stay committed to the euro.
The benchmark 10-year government bond yield is 20 basis points lower at 2.90 per cent. The extra premium investors demand to hold the nation’s 10-year securities over similar-dated German notes narrowed to 243 basis points. Milan’s FTSE MIB stock gauge is up 2.2 per cent.
Italy’s 10-year bond yield rose above 3 per cent last week amid concerns about the country’s future in the eurozone. The spread between Italian and German debt, a widely watched indicator of political risk sentiment in the euro area, hit 2.65 percentage points. When political risk and uncertainty increase, investors demand higher compensation for the risk they are taking.
Upbeat remarks by senior eurozone officials on Wednesday, who suggested the European Central Bank was likely to wind down its bond-buying programme later this year, also contributed to last week’s bond sell-off. The ECB plans to spend €30 billion a month on mostly government bonds until September under the €2.5 trillion QE programme.
The anti-establishment Five Star Movement and the far-right, anti-immigrant League won 33 per cent and 17 per cent of the vote in the March general elections, respectively, on the back of widespread dissatisfaction with traditional parties, weak economic growth and the migration crisis. They joined forces to implement a package of tax cuts and spending increases, which would put Italy at risk of violating EU budget rules. The populist coalition was only accepted by Italy’s President Sergio Mattarella once Paolo Savona was blocked from taking up the job of finance minister, because of his calls for a plan B to leave the euro.
Luigi Di Maio, the Five Star leader, and Matteo Salvini, the League chief, picked Giuseppe Conte, a little-known civil law professor, as a compromise candidate to lead the government.
The new government was sworn in on June 1, ending a political crisis that had gripped the eurozone’s third-largest economy for nearly three months.
Mr Di Maio and Mr Salvini retreated from plans to ask the European Central Bank to cancel €250 billion in Italian debt purchased as part of the QE programme. Mr Conte has said that debt reduction would only be achieved through economic growth.
Investors are concerned that the parties’ promises, such as a basic income of €780 per person, ripping up a pension reform and a flat tax for families and corporations, could cost more than €100 billion per year when Italy already has one of the highest debt-to-GDP ratios in the eurozone, at more than 130 per cent. In absolute terms, Italy’s debt is the third-largest in the world, after the US and Japan, which is seen as the country’s great source of financial vulnerability.
