Italy Responds To League Coalition Possibility
Italy’s borrowing costs broadly rose and shares declined as a draft program for a potential coalition government suggested plans to ask a debt forgiveness of EUR 250B and a set up of the process that would help countries to quit the euro. The anti-establishment 5-Star Movement and the far-right League party are the ones who came up with a plan. Another shocking news is forming an “economic and judicial procedures that allow member states to leave monetary union”.
According to League’s economic spokesman, the debt forgiveness was never in the government program. Nonetheless, market was shaken. Chris Scicluna (head of economic research at Daiwa Capital Markets) told: “It’s right to resonate with markets because it tells you about the sense of the wisdom between these negotiating parties”, adding:“With continued ECB bond-buying there is confidence there won’t be a disorderly selloff, but if you get fiscally irresponsible policies and confrontation with the ECB and EU partners then there’s a risk of a far greater blow-out of Italian bond spreads.”
Italy’s 10-year bond yield surged almost 10 bps to 2-month maximum of 2.04%, marking the largest daily increase in a year. The German Bund yields spread extended from 129 basis points to 142 basis points. Italy’s debt insurance costs in the 5-year credit default swaps (CDS) market rose to the 2-month maximum of 102 bps while 2-year bond yields grew to 0.038%. Italian stocks .FTMIB dropped 1.8%. Asectoral index .FTIT8300 declined 2.9%. Stocks UniCredit (CRDI.MI) and Intesa Sanpaolo (ISP.MI) fell almost 3%.
The whole controversy has evidently hit the market, and is likely to get a negative response from the EU headquarters.