Silver as an investment

Italian Bonds Whiplashed After Finance Minister’s Future Thrown Into Doubt

BTP yields shot higher early Friday morning after Italian newspaper La Repubblica reported that M5S chief Luigi Di Maio and League leader Matteo Salvini had weighed whether to “threaten unofficially to use the weapon of seeking Giovanni Tria’s resignation” after reports leaked in recent days suggested that the two populist leaders were battling the influential finance minister – whose hasty appointment by the populist coalition saved Italian bond markets from the chaos of May – over appointments to the state lender, CDP. Di Maio and Salvini had reportedly missed a planned meeting with the prime minister on Thursday to discuss the issue.

As a reminder, markets are soothed by Tria (and his continued presence) because he was the voice of moderation brought in to enthusiastically endorse the euro, to assuage fears that the populists would push the country toward an “Italeave” scenario – which would promptly lead to the breakup of the euro and the EU. And to be sure, when you have a relatively radical populist government ruling in an uneasy coalition all the while struggling to maintain confidence in markets long enough to avert another banking crisis, there’s bound to be conflict with the voices of moderation.

Giovanni Tria

Here’s more on why Tria’s continued presence in the Italian government is so important to markets:

Tria, a 69-year-old academic, is seen as a stabilizing force in the government. He’s viewed as a guarantor that the populist coalition will observe some degree of fiscal responsibility despite the populists’ plans to cut taxes and boost spending on benefits. Di Maio in particular needs to make progress on his flagship proposal for a citizens’ income for poorer families after being eclipsed by his rival Salvini during their first two months in power.

Under Italian law, the prime minister can’t directly fire government ministers though he can pressure an official to step aside. A rift between the key political figures in the government and the finance chief could lead to gridlock with the administration set to deliver details of its first budget in September.

The news caused the FTSE MIB Index to drop as much as 1.3% while the FTSE Italia All-Share Banks index falls as much as 1.7%. The spread to bunds for BTPs widened by 10 basis points.

With memories of May’s market chaos still fresh in their heads, the Italian Finance Ministry quickly denied the La Repubblica rumors, saying that tales of a rift between the finance minister and the two most powerful ministers in the governing coalition – themselves representing the moderate and populist wings of the Italian government – are “pure invention.” Meanwhile, Di Maio told reporters in parliament that there is no clash with Tria, and that he never asked Tria to resign.

Still, doubts remain according to Bloomberg.

“The conflict is not new news, but the prospect of Tria leaving the government is not a positive for BTPs and confidence in the new government,” said Antoine Bouvet, a strategist at Mizuho International Plc. “He was very much the appointment aimed at calming markets earlier this year.”

The Italian governing coalition is still very young, and has already survived serious challenges (such as the push by Italian President Sergio Mattarella for new elections after coalition talks collapsed), perhaps they will learn to get the leakers in their ranks under control. But one thing is clear: markets haven’t yet built up a lot of trust with the new Italian government.

Finally, pouring some more cold water on enthusiasm, in an interview with Corriere della Sera, the euroskeptic head of the budget committee, Claudio Borghi, said Italy will leave Euro sooner or later.  “I am completely convinced of it,” Corriere on Thursday quoted Borghi as saying in response to whether Italy will leave the Euro, which is probably why despite the official denial, Italian bonds have continued to drift wider as the much hated redenomination risk makes an unexpected return.