The leaders of Italy’s two leading populist parties took aim at global financial markets on Wednesday, accusing investors of trying to “blackmail” them by unloading Italian assets as they tried to form a new government.
A sharp sell-off that saw yields the Italian government’s benchmark 10-year bond suffer their biggest move in two years was triggered by the parties calling for a “pre-Maastricht setting” in EU economic policymaking — suggesting they would abandon the fiscal rules underpinning the euro once in government.
The yield on the 10-year topped 2.12 per cent on Wednesday, a 17 basis point increase that pushed it to 150bp higher than the equivalent German Bund, the widest spread since January.
The anti-establishment Five Star Movement, the leading vote getter in March’s general election, tempered its anti-euro rhetoric during the campaign. But Wednesday’s call for the EU to return to a period before Brussels forced strict budget discipline to foster economic convergence among member states suggested the party was warming to the views of its potential coalition partner, the far-right League.
“As soon as we have considered a Five Star/League government the anxiety has begun,” said Luigi Di Maio, Five Star’s leader. “I see a certain fear among the Eurocrats. But they don’t scare me.”
Such dismissiveness towards financial market jitters over Italy’s direction has been rare in Rome in recent years and hearkens back to the height of the eurozone crisis, when a perceived lack of urgency led EU leaders to push for the removal of then-prime minister Silvio Berlusconi.
“They are trying to stop us with the usual blackmail of rising spreads, falling stock markets and European threats,” said Matteo Salvini, the leader of the League “This time change is coming, with more work and fewer illegals, more security and fewer taxes. #Italians first,” he wrote on his Facebook page.
Mr Salvini’s League and Mr Di Maio’s Five Star are on the brink of a formal alliance after a nine-week stalemate followed by less than a week of serious negotiations.
The populist coalition has long been seen as the most disruptive scenario for eurozone leaders, who have become alarmed by the parties’ lavish campaign promises to cut taxes, boost spending, and reverse structural reforms in an economy already suffering from high debt levels and how productivity.
Until this week, markets had been relatively unfazed by such a potential political tie-up, amid confidence that they would not pursue policies that were particularly radical.
But fears were exacerbated by a draft of the negotiating text being discussed by Five Star and the League published by Huffington Post Italy, which revealed they had considered proposing a path for countries to leave the euro, and asking the European Central Bank to “freeze” or “cancel” €250bn in Italian debt.
“The Italian10 yr yield is rocketing higher,” Jeffrey Gundlach, one of the most closely-watched bond investors, wrote on Twitter. “Up 40 basis points in under two weeks. Chart looks very, very bearish. The sands are shifting.”
Five Star and League officials are insisting they want to transform European economic policymaking first by renegotiating EU treaties with other countries before they take more radical steps.