Market Extra: Italian assets slide amid political upheaval as Draghi resigns

United States

A previous version was corrected for misstating the timing of Draghi’s resignation.

Italian assets fell sharply on Thursday on news that Prime Minister Mario Draghi had tendered his resignation, after members of his governing coalition refused to back him in a no-confidence vote.

Traders dumped Italian government bonds, pushing the yield on 10-year paper TMBMKIT-10Y, 3.558% up 20 basis points to 3.570%. The yield spread with Germany, a closely watched gauge of stress for Rome’s debt, jumped to 228 basis points, as doubts grew that Italy could fulfill conditions necessary to receive its €200 billion ($ 204 billion) share of the EU’s coronavirus recovery fund.

The FTSE MIB I945, -1.49% equity index shed 2.4% to 20840 as investors also worried that Draghi’s departure would stymie the chances for Italy to deliver economic reforms designed to improve efficiency and long term growth.

“The context of economic and geopolitical uncertainty is thus combined with a phase of political turbulence and a risk of lower credibility at the international level,” said Luigi De Bellis, an analyst at Italian brokerage Equita, in a note to clients.

The fresh turmoil for Italy comes ahead of a European Central Bank meeting and policy decision on Thursday. The ECB is expected to raise interest rates for the first time in more than 10 years, a tightening of policy that could more pressure on bonds of heavily indebted eurozone nations such as Italy and Greece.

Draghi offered his resignation to President Sergio Mattarella during a morning meeting at the Quirinale Palace, according to the Associated Press. Mattarella’s office said the president had “taken note” of the resignation and asked Draghi’s government to remain on in a caretaker fashion.

Mattarella may now decide to dissolve Parliament, opening up the possibility of elections by late September.