Italian government bonds slumped on Thursday with Prime Minister Mario Draghi in danger of being booted out of office, only a week ahead of a new tool from the European Central Bank that’s meant to quell such turmoil in eurozone debt markets.
The yield on the Italian 10-year bond
TMBMKIT-10Y,
jumped 26 basis points to 3.40%, or 217 basis points above the 10-year German bund
TMBMKDE-10Y,
The euro
EURUSD,
was once again flirting with parity, trading at $1.0006.
Draghi’s coalition was at risk after the populist 5-Star Movement said it would boycott a vote on energy relief. Their objection lies with a provision that would let Rome operate a garbage incinerator, and they’re also upset with Draghi’s stance on Russia.
Also read: Fate of Italy’s government hangs in the balance
Potentially, Draghi could be forced to tender his resignation, or may choose to do, given his stated desire to keep the populist party in his coalition.
The ECB next week is set to introduce its tool meant to limit the spread between bond yields of different eurozone countries.
“The tool was likely never meant to counter spread-widening due to idiosyncratic country risk (on the contrary, it prevents contagion and therefore reduces the leverage of the ‘offending’ country). However, the timing of this crisis could tilt the risks around the tool – which in any case we do not expect to address fragmentation, but rather dislocation – towards tighter limits, stricter conditionality and higher pain thresholds,” said analysts at Citi.
If Draghi resigns, then a new election could be held in late September or early October.
