A sell-off in Italian financial markets intensified on Thursday after Prime Minister Mario Draghi resigned, sparking fresh concerns over the future of the country’s heavily indebted economy.
The yield on Rome’s 10-year government bond jumped 0.18 percentage points to 3.57 per cent as Draghi’s national unity coalition unravelled. Bond yields rise as their prices fall.
The moves on Thursday took the gap between Italian and German benchmark 10-year yields — a closely watched gauge of market stress — to about 2.3 percentage points, reflecting a widening of about 0.3 percentage points in just two days.
Draghi handed his resignation to President Sergio Mattarella on Thursday morning, after he won a confidence vote on Wednesday night but lost the support of members of his coalition. Mattarella is now expected to dissolve parliament and announce snap elections.
The ructions in Italian debt on Thursday put pressure on other eurozone bond markets, with Greek, Spanish and Portuguese yields also rising.
A FTSE gauge of Italian stocks slid 2 per cent. The country’s largest banks, which are big holders of Italian debt, led the declines, with Intesa Sanpaolo and UniCredit each down more than 6 per cent.
The sell-off in Italian debt heightened the stakes for the European Central Bank as it prepared to raise interest rates at its policy meeting on Thursday for the first time since 2011. Economists widely expect the central bank to increase borrowing costs by 0.25 percentage points from their current level of minus 0.5 per cent, but rate-setters were also poised to discuss a possible 0.5 percentage point rise.
Analysts also expected the ECB to shed light on a mooted “anti-fragmentation” tool aimed at limiting divergence in borrowing costs between the eurozone’s strongest and weakest nations — a challenge heightened on Thursday by the expanding Italian yield spread.
Ludovico Sapio, macro research associate at Barclays, said that “Draghi’s departure from the political scene and snap elections are a clear negative for Italy and the EU”, adding that this will “complicate the potential design and use of the [ECB’s] anti-fragmentation tool”.
Kiran Ganesh, global head of investment communications at UBS, said: “Markets want something that’s going to control the spreads of Italian bonds going straight up.”
The euro gained 0.3 per cent against the dollar to $1.02, after last week tumbling to parity with the US currency for the first time in 20 years.
Elsewhere, Russia resumed its gas supply to Europe through the critical Nord Stream 1 pipeline on Thursday, following a 10-day maintenance period.
However, this was not enough to reassure equity markets, with the regional Stoxx Europe 600 losing 0.2 per cent. In Asia, Hong Kong’s Hang Seng index dropped 1.5 per cent.
Futures contracts tracking Wall Street’s S&P 500 slipped 0.2 per cent lower. The broad gauge had closed 0.6 per cent higher on Wednesday, with the tech-heavy Nasdaq Composite closing up 1.6 per cent after Netflix revealed that it had lost fewer subscribers than expected, pulling other streaming platforms higher.