European Union accused of 'interfering' in Italian politics

18 May, 2018, 09:34 | Author: Billie Castillo
  • The political upheaval in Italy doesn’t pose a systemic risk according to Bluebay’s David Riley

The debt wipe would cut 10 percent off Italy's debt/GDP ratio but the European Union will be concerned this sends a negative message to other Eurozone countries still in the middle of tough austerity measures.

The leaders of Italy's two political upstarts, the Five Star Movement (M5S) and the League, say they have agreed on the final draft of a contract that lays out their vision for a "government of change".

A draft of their proposed German-style coalition contract - dated Monday morning - featured a proposal for "specific technical procedures" that would allow countries to leave the single currency and recover "monetary sovereignty".

The report spooked markets, even though the League's economic spokesman told Reuters that debt cancellation was never in an official draft of a government programme.

USA 10-year Treasury yields rose, extending this week's bond market selloff, as traders and investors have not reached a consensus on whether it was time to buy or if the market was vulnerable to more selling.

"It's right to resonate with markets because it tells you about the sense of the wisdom between these negotiating parties", said Chris Scicluna of Daiwa Capital Markets.

The likely arrival of a populist government took its toll on the Italian banking sector at the Milan Stock Exchange Thursday, in particular the Monte dei Paschi di Siena bank, majority-owned by the Italian state, which saw its share price tumble.

Yields on benchmark Italian 10-year debt rose three basis points on Thursday to 2.13 percent, its highest since late-February.

Italy has been in a period of political gridlock since its election in March left no clear victor.

This spread, a closely watched indicator of relative risk, was 129 bps on Tuesday.

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While speculation abounds as to who leaked the document, Italy's borrowing costs jumped and stocks slid once the leak was made public.

Spreadbetters see Britain's FTSE opening 4 points lower, while Germany's DAX is expected to rise 13 points and France's CAC is seen gaining 10 points.

"We will need to renegotiate European Union agreements to stop Italy suffocating", League leader Matteo Salvini said on Saturday after a day of talks with his 5-Star counterpart Luigi Di Maio.

But unease was evident across Italian markets. Shares in Italian banks were broadly lower, with a sectoral index.FTIT8300 on course for their worst day in five months, down 2.9 percent.

The outgoing centre-left administration promised the fiscal deficit would fall this year to 1.6 percent of GDP from 2.4 percent in 2017, and then decline to 0.8 percent next year with a balanced budget in 2020.

The 39-page document, obtained by Huffington Post Italia, also calls for a renegotiation of Italy's European Union budget contributions, an end to sanctions against Russian Federation and plans to dismantle a 2011 pension reform that raised the retirement age.

President Sergio Mattarella, who has repeatedly stressed the importance of maintaining a strong, pro-European stance, may also be dismayed.

"Thats life, that's the result of elections in Italy", another official said.

The Syriza-led government of Alexis Tsipras went into direct confrontation with its European Union partners, until Greece was on the brink of leaving the eurozone.

It would also be Italy's first all-populist government.

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