Italy’s bond yields rise as it heads for another election

ITALY’S president, Sergio Mattarella is expected to decide on May 30th whether to call a snap election as early as July in an effort to resolve a rapidly deepening political and economic crisis that has sent tremors through global financial markets.

The president had originally planned to put a former IMF economist, Carlo Cottarelli, at the head of a government of technocrats, tasked with steering the country back to the polls after the summer. But Mr Mattarella was reportedly considering changing tack after meeting Mr Cottarelli on May 29th amid growing evidence of support in parliament for an earlier vote. Not a single big party has declared its readiness to back Mr Cottarelli’s proposed administration in a necessary vote of confidence.

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In a sign of investors’ concern, the yield gap between Italian and German benchmark government bonds soared from 190 basis points on May 28th to more than 300. The governor of the Bank of Italy, Ignazio Visco, warned his compatriots not to “forget that we are only ever a few steps away from the very serious risk of losing the irreplaceable asset of trust.”

Mr Mattarella turned to the luckless economist after the last chance for a coalition—between the maverick Five Star Movement (M5S) and the hard-right Northern League—evaporated on May 27th. If the president had hoped that his choice of Mr Cottarella would reassure capital markets, he was swiftly disabused. Satisfaction with the blocking of what would have been Italy’s—and western Europe’s—first all-populist government since the end of the Second World War soon gave way to fears of an anti-establishment landslide at the forthcoming polls.

The M5S and the League favour big spending increases and tax cuts which they claim will revive Italy’s sluggish economy. But their policies risk adding to its already large public debt (132% of GDP at the end of 2017). Fears in the secondary bond market have already begun to affect the primary market, increasing the cost of servicing Italy’s debts. On April 29th the Treasury in Rome managed to place 5.5bn of six-month bills, but at a rate of 1.213%—up from minus 0.421% at the last comparable auction on May 26th. The Milan bourse fell 5.8% from its close on May 25th and the euro fell to an 11-month low against the yen.

The prospect of a Five Star-League government dissolved after Mr Mattarella refused to accept the two parties’ choice for finance minister: an 81-year-old Eurosceptic, Paolo Savona. The leader of the M5S, Luigi Di Maio, claimed afterwards they had proposed other names, prompting the president’s office to issue a rare, blunt denial. The issue is crucial: if Mr Di Maio is telling the truth, then it can reasonably be claimed, as the thwarted coalition partners have said, that the president was bent on scotching at all costs a government inimical to Brussels, Berlin and the bond market. Mr Mattarella’s choice of an IMF alumnus did little to quell such speculation. But if the president’s spokespeople are telling the truth, it suggests that the populist duo were less interested in Mr Savona than in forcing an early poll from which the League in particular stands to benefit. Mr Salvini refused to agree to one of his closest associates becoming finance minister instead. He has argued that he needed Mr Savona in the cabinet to show Italy’s partners that it was serious about demanding a reform of the euro zone, though he only brought the veteran economist into play late in the game.

At all events, the stage is set for a critical struggle. In one camp stand mainstream politicians of the centre-right and centre-left. In the other are those that a former prime minister, Matteo Renzi, has dubbed i sfascisti: a play on words combining sfasciare (to wreck) and Fascisti (Fascists). The fairness of Mr Renzi’s characterisation will soon be tested against an ugly background of death threats against Mr Mattarella on social media.

June 2nd is Republic Day. Mr Di Maio has called his followers to Rome for a mass protest against Mr Mattarella, whom he has said should be impeached. He has asked Five Star sympathisers elsewhere to hang out Italian flags to show their support.

Mr Salvini has said the League had booked a thousand town squares to explain the aborted government’s programme, and will now use the bookings for protest rallies of its own. His behaviour does little to allay fears that Italy could become the Hungary of western Europe. He recently turned up at a high-profile soccer match wearing a jacket associated with the neo-fascist CasaPound movement. And demanding that the president set a date for the election, Mr Salvini added: “Otherwise we truly shall go to Rome.” He will certainly have known that this would be taken by many Italians as an allusion to an earlier constitutional crisis, in 1922, which Benito Mussolini’s fascists exploited to seize power by means of a “march on Rome”. Such talk in the present climate is wildly irresponsible.