- Huffington Post Italia leaked a government proposal late Tuesday showing that populist parties had drafted plans to ask the European Central Bank for debt forgiveness of €250 billion ($300 billion).
- Italy’s 10-year yield hit its highest level in two months following the report.
- Bond yields in other eurozone countries also spiked, with the Greek 10-year rising 25 basis points.
Eurozone bond markets turned chaotic Wednesday after leaked documents suggested Italian coalitions paving the way for a new administration were floating plans to ask for €250 billion ($300 billion) in debt forgiveness for the country.
The cost of borrowing in Italy hit its highest level in two months, with the 10-year bond yield jumping 14 basis points, to 2.082%, its biggest daily move in nearly a year. The two-year was up 17 basis points, to 0.11%.
Meanwhile, the spread between German and Italian 10-year bond yields, an indicator of financial stress in the eurozone, was up to 144 basis points from 129.
Huffington Post Italia late Tuesday leaked a proposal by the antiestablishment Five Star Movement and the far-right League — populist parties that came out on top in an inconclusive March election — outlining a plan to ask the European Central Bank for a writedown.
The 39-page document also pointed to the possibility of establishing a way for countries to leave the euro, a proposal floated by the parties in the past.
Five Star and the League released a statement hours after the draft was published, saying it was „an old version that has been considerably modified” and pushing back on the euro blueprint, adding that they decided „not to call into question the single currency.”
Still, the prospect of an Italian debt writedown is roiling vulnerable eurozone bond markets. Spanish and Portuguese 10-year bond yields climbed nearly 3 basis points each.
Perhaps most troubling, the 10-year bond yield in Greece climbed 25 basis points, to 4.36%, its highest level in over a month and just 5 points below its 2018 high.
Greece, which has received three financial bailouts since 2010, has been seeking relief from national debt that has piled up to more than 195% of gross domestic product. Even after significant economic reforms, the country is still „vulnerable to shocks,” a recent survey by the Organization for Economic Cooperation and Development found.
Elsewhere, contagion risk doesn’t seem to have spread to the euro. While on Wednesday it fell to its lowest level this year, at 1.1764 versus the dollar, the drop was small relative to bond market movements and could be linked to tepid inflation data.
In addition to the parties walking back a euro-exit plan, that could be partly because the market is expecting further changes to the agreement.
„EUR/USD is yet to meaningfully react this morning,” the Nomura analyst Jordan Rochester wrote in an email. „The full contents of the current draft are known only to the two sides and it is yet to be finalised and has scope to change again.”