Tuesday 17 July 2018

Radical coalition talks point to Italy's euro exit

Five-Star Movement leader Luigi Di Maio, centre, flanked by his party colleagues Giulia Grillo, and Danilo Toninelli. Photo: AP
Five-Star Movement leader Luigi Di Maio, centre, flanked by his party colleagues Giulia Grillo, and Danilo Toninelli. Photo: AP
Donal O'Donovan

Donal O'Donovan

Italian bonds slumped as populist parties struggling to form a government discussed a potential government debt write-down of €250bn.

Talks between the anti-immigrant League and the anti-establishment Five Star Movement also put an eventual exit from the Maastricht Treaty - and hence the euro - on the table, according to reports.

The League's Armando Siri told La7 television on Wednesday that a write-off of debt owed to the European Central Bank (ECB) was being discussed. The two parties also released a statement setting out their opposition to key euro structures.

"The structure of European economic governance, based on the dominance of the market, and the respect for rules that are stringent and unfounded from a social and economic point of view, requires a rethink with our European partners," they said. Italy is the Euro area's third biggest economy, and biggest debtor - owing as much as €2trn. It is heavily reliant on the bond market.

The yield on benchmark 10-year Italian government bonds climbed above 2pc for the first time since March on the news, although there was little sign of contagion spreading to other borrowers. Italian shares slid, and the euro was weaker.

The anti-establishment Five-Star Movement and the far-right League party plan to ask the European Central Bank to forgive the debt, and could look to create "economic and judicial procedures that allow member states to leave monetary union".

That potentially means tearing up the Maastricht Treaty.

The report spooked markets, even though the League's economic spokesman told Reuters that debt cancellation was never in an official draft of a government programme.

"It's right to resonate with markets because it tells you about the sense of the wisdom between these negotiating parties," said Chris Scicluna of Daiwa Capital Markets. "If you get fiscally irresponsible policies and confrontation with the ECB and EU partners then there's a risk of a far greater blow-out of Italian bond spreads."

League leader Matteo Salvini said he was not intimidated by a rise in bond yields. The leaked proposals also call for renegotiation of Italy's EU budget contributions, closer ties to Russia and more European co-operation in relation to the refugee crisis. (Additional reporting agencies)

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