Italian markets in turmoil as government edges closer to collapse
Traders have sold off Italian bonds and the country’s stock market has plunged as the government teeters on the verge of collapse after League party leader Matteo Salvini called for a snap election.
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Yields on 10-year Italian debt have hit a one-month high of 1.822 per cent after a 29 basis point (0.29 percentage point) rise by 4pm UK time. Yields move inversely to prices, with a rise signalling investors are selling bonds they now consider more risky.
Yields on three-year Italian government debt were set for their biggest weekly rise this year. They had climbed 34 basis points to 0.678 per cent.
A sharp stock sell-off saw Italy’s FTSE MIB stock index tumble 2.5 per cent. Nervousness spilled over into European stocks, dragging down Germany’s Dax index 1.1 per cent and the pan-European Euronext 100 index 0.9 per cent.
Salvini, whose right-wing League party is in power with the anti-establishment Five Star Movement, called for a snap election last night, saying the coalition was unworkable.
The two sides have clashed over different issues but a ferocious debate over a planned railway between Italy’s Turin and France’s Lyon has shaken the government. Five Star strongly opposes the railway due to its environmental impact and cost.
The yield on Italian government debt reached over seven per cent during the Eurozone crisis of the early 2010s. It has since fallen to record lows, however, after Italy pulled back from a clash with the European Union and the European Central Bank signalled more stimulus ahead.
Italy has very high levels of public debt, meaning that a rise in the cost of government borrowing could stop it from paying back its creditors.
Opinion polls suggest an election would deliver a right-wing coalition, led by the League, whose anti-immigration stance is popular.
Jack Allen-Reynolds, senior Europe economist at Capital Economics, said such as government is likely to clash with the European Union over public debt rules.
“The League has been the main antagonist so far, and has pledged to cancel a VAT hike planned for January and to slash income taxes, without specifying how all of this would be paid for.”
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“This makes us more confident in our view that bond yields in Italy will rise over the rest of the year.”
(Image credit: Getty)