Italy’s likely new coalition government is spooking investors with its controversial spending plans and underlying euroskepticism.
But prospects for a return of the darkest days of the eurozone sovereign debt crisis seem low, say economists at Commerzbank, and that’s thanks in large part to the actions already undertaken by the European Central Bank. But the ECB, led by former Bank of Italy chief Mario Draghi, can’t paper over the cracks in the euro indefinitely.
While the antiestablishment 5 Star Movement and far-right League disagree on many issues, both are calling for expansionary spending that would ignore the European Union’s deficit rules, setting up a confrontation with Brussels and its eurozone partners.
That’s contributed to a selloff in Italy’s bond market that has accelerated the past two weeks, with the yield on the 10-year bond, known as the BTP TMBMKIT-10Y, +6.37% hitting an intraday high of 2.555% Friday, the highest since August 2014. It had stood at 1.74% on May 3, according to Tradeweb. Yields rise as bond prices fall.
The premium demanded by investors to hold the Italian bond over the German 10-year bund TMBMKDE-10Y, -14.34% went from around 1.26 percentage points in late April to more than 2.16 percentage points, representing the widest spread since 2014.
Ralph Solveen, economist at Commerzbank in Frankfurt, outlined four ways the ECB’s actions are squelching the prospect of a return of a crisis, at least for now.
Remember the OMT
At the top of the list is the ECB’s Outright Monetary Transactions program. The OMT program was assembled after Draghi’s famous 2012 pledge to do “whatever it takes” to preserve the euro. Never used, OMT allows the ECB to make purchases of government bonds issued by eurozone countries in the secondary market once a government requests assistance.
Draghi’s pledge and the promise of the OMT program were credited six years ago with pulling Italian yields down from crisis levels that...