Italian debt sells off as Draghi government teeters on brink

Italian financial markets sold off on Thursday as Prime Minister Mario Draghi’s government teetered on the brink of collapse.

The yield on Rome’s 10-year government bond jumped 0.13 percentage points to 3.5 per cent after Draghi lost the support of members of his national unity coalition in a confidence vote on Wednesday night. 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 2.26 percentage points, reflecting a widening of 0.22 percentage points in just two days.

Although Draghi won the vote on Wednesday, he signalled on Thursday that he was planning to hand his resignation to Italy’s president.

The ructions in Italian debt also put pressure on other eurozone bond markets, with Greek, Spanish and Portuguese yields also rising.

A FTSE gauge of Italian stocks slid 1.9 per cent in early trading. The country’s largest banks, which are big holders of Italian debt, led the declines, with Intesa Sanpaolo and UniCredit each down about 5 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 analyst 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”.

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 in equity markets, the regional Stoxx Europe 600 lost 0.3 per cent, following Asian stocks lower after Hong Kong’s Hang Seng index dropped 1.5 per cent.

Futures contracts tracking Wall Street’s S&P 500 were flat. 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.