Italy “a Few Short Steps” Away from Losing Investor’s Trust

The chief of Italy’s central bank warned on Tuesday that the country was “only ever a few short steps” from losing investors’ trust, with markets dumping stocks and bonds amid the fear of repeat elections. Such elections will become a de-facto referendum for the nation’s euro membership.

On Tuesday, Carlo Cottarelli, who is a prime minister-designate, is scheduled to unveil his cabinet in the middle of the tension between the head of the state and the two political parties. He is set to meet President Sergio Mattarella later on the day.

Cottarelli was previously an International Monetary Fund official chosen by Mattarella on Monday. He was tasked to lead a stop-gap government, which would have led to early elections. He is due to meet the head of state later in the afternoon.

The anti-establishment 5-Star Movement and the far-right League were the biggest winners from the inconclusive elections in March. They abandoned plans to form a coalition government over the weekend after Mattarella vetoed their choice for economy minister, who was an 81 year-old man that has proposed Italy to leave the euro.

Investors agree that Cottarelli,  who is 64 years old, will not be able to gain the support needed to pass a budget. This may potentially lead to repeat elections in the autumn in which the two euroskeptic parties could return with a much stronger representation in the parliament.

A new survey showed that the support for the League had increased to 27.5 percent, which was 10 points higher than the March 4 elections. Meanwhile, the 5-Star Movement would decrease by about 3 points to 29.5 percent. The combination of the two would have a 57 percent majority in parliament in the event that they join forces again.

The concerns sent Italian stocks to their lowest level since July 2017, pushed even lower by a selloff in the shares of banks. Many of such banks invested heavily in the Italian government debt.

The selloff triggered the increase in yields on the debt. Those on two-year bonds, which are the most sensitive to political upsets, were propped up for their biggest one-day jump in 26 years.

The uncertainty in Italy, which is the eurozone’s third biggest economy, also pushed the euro down to fresh multi-month lows. Investors had also raised concerns about the planned coalition’s proposed spending program in Italy, which already has the third highest public debt in the world. The proposed spending program was seen to put the country into conflict with the European Union.

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