Italy’s financial markets are bracing themselves for an almost inevitable collapse of the government of Prime Minister Mario Draghi. On Thursday, the Italian Prime Minister handed in his resignation to the president.
Italy’s FTSE MIB stock index slumped 2.5 percent on Wednesday after three of Prime Minister Mario Draghi’s main coalition partners snubbed the confidence vote, Reuters reported.
A financial disaster
The political uncertainty could put additional pressure on Italian banks and its financial sector in particular, according to experts.
“Italy’s political crisis unfolds just as the European Central Bank (ECB) prepares to unveil its anti-fragmentation tool. One needs to hope markets will perceive it as sufficiently bold because, if not … Italy could well be in the markets’ cross-hairs given the situation,” former IMF executive director, Carlo Cottarelli told Reuters.
In turn, according to Filippo Diodovich, Senior Market Strategist at IG Italia, the choice of the ruling coalition parties to no longer support the government will cause a sharp rise in Italian government bond yields. “We believe that investors’ fears about a prolonged period of political instability in Italy could drive the spread in the short term to 250 basis points and in the medium term to 300 basis points,” he said.
On Wednesday Mario Draghi won the vote in the Italian Senate by 95 to 38 but the majority of his coalition partners refused to take part in the vote, leaving his 18-month-old administration in disarray with an early election in September or October the most likely outcome.
On Thursday, the Italian Prime Minister handed in his resignation to the president.
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