Italians spreads have resurged as the new government as the European Central Bank (ECB) considers unwinding its quantitative easing programme and the new government retains a politically combative tone.
Resurging bond yields
Italian 10-year bond yields reached 253 points on Wednesday, up from 240 points on Tuesday. Milan’s stock market closed does with 1,3% loses. Since April, Italian sovereign bond yields are up by 110 points.
Giuseppe Conte’s government received a confidence vote in Italy’s bicameral houses – parliament and Senate – with an overwhelming majority. But, on Tuesday’s address of the parliament, Contet expressed a condemnation of austerity politics that is raising concerns.
Conte made clear that Rome wants to reduce public debt via “growth and not with austerity,” paving the way for a confrontation with Brussels, Frankfurt and Berlin. The Italian government is committed to a programme that includes cutting taxes, lowering the age of retirement and guaranteeing a minimum income for all citizens.
Italy’s economy minister Giovanni Tria published a book on Wednesday proposing a massive programme of public infrastructure to be funded by the public deficit, which in his view would lead to a “virtuous circle” in the economy without affecting the sustainability of public debt.
Bracing for a clash with the ECB
Rome’s economic policy is founded on the assumption of sustained monetary financing of the economy, which the ECB is ready to unwind.
The board of the ECB is due to meet in Riga on June 14; if the board votes to end the €2,6 trillion bond-buying programme Italian spreads could rise further.
Rome has already expressed dismay at what the government perceives as a slowdown in the purchase of Italian bonds. The accusation expressed in the Financial Times by the Lega’s chief economic adviser, Claudio Borghi, is that the ECB is applying political pressure on the Italian government by manipulating the bond market.
The Belgian member of ECB’s board Peter Praet told investors in London on Wednesday that Mario Draghi is keen to remain unfazed by the political crisis, Bloomberg reports.
The Governor of the Estonian Central Bank, Ardo Hansson, told Sakala newspaper that policies the markets condemn will translate to rising interest rates for sovereign borrowing “pretty fast.” The warning from Frankfurt is clear and it is echoed in Berlin.
Berlin becomes vocal
The German Chancellor Angela Merkel said on Wednesday that she is approaching talks with the Italian government with an open mind, recalling her experience of negotiations with Greece. “We negotiated in a very tough way with Greece and in the end we reached a good accord,” Merkel said.
The German President Frank-Walter Steinmeier told Die Zeit that despite political concerns but Italy must be treated with respect. A political confrontation similar to Greece in the countdown towards a debate on European reforms may not be timely.