Italian Stocks/Bonds Reverse Draghi Gains As Salvini Threatens Coalition

Update (0855ET): Well that optimism lasted less than even we expected as League leader Salvini has threatened that his party will only remain in government if 5-Star is not in the coalition.

That sent Italian yields spiking back higher…

Source: Bloomberg

And Italian stocks lower….

Source: Bloomberg

How long before Draghi resigns again?

There is much at stake: a government collapse could worsen social ills in a period of rampant inflation, delay the budget, threaten EU post-pandemic recovery funds and send jittery markets into a tailspin.

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In what smells like a ‘whatever it takes 2.0’ moment, Italian Prime Minister Mario Draghi said he was willing to remain in power but warned he would only reverse a previous decision to quit – and prevent Italy from tumbling into early elections – if his fractious coalition partners backed his reform agenda.

Draghi’s reassurance/threat comes a day before The ECB is set to hike rates for the first time since 2011.

As The FT reports, votes in parliament are due on Wednesday and Thursday that will serve as de facto confidence votes on his administration.

“The only reason I am here… is because Italians have asked me to stay,” Draghi told the Senate.

“But are you ready to rebuild? Are you? This is not an answer you have to give me – but you must answer the Italian people.”

Draghi threatened Five-Star leader Giuseppe Conte that his calls for higher public spending on social welfare measures is a no-go, stating that such calls would have to stop  with parties committing to compromise and to undertake difficult reforms in order to remain on a path to fiscal rectitude – if he was to remain in office.

“Italy doesn’t need a facade of confidence that evaporates before unpopular measures,” he said.

“We need a new pact of confidence that must be transparent and concrete.”

Parliamentarians will now debate for over five hours, setting out their positions. Draghi will then respond, before a vote later Wednesday.

“Draghi did not compromise. He was very tough,” Francesco Galietti, Policy Sonar analyst, told AFP.

“The entire speech was stick and carrot – though much more stick than carrot”.

The comments sent Italian bond yields lower, erasing most of the post-confidence-vote, post-resignation spike that prompted a wave of ‘defragmentation’ fears once again…

Source: Bloomberg

Interestingly Italian stocks are not loving the news…

Given that this is Italy, we suspect the market’s hope for a renewed coalition continuing forward is misplaced, but hey, hope has been a successful strategy for the last decade after all (backed by central bank liquidity of course).