'Draghi Welcome' Italy Stock and Bond Markets Rise Together

MIB Index Surges 2.1%... 10-Year Government Bond Yield Drops 0.6 Percentage Points

[Asia Economy Reporter Park Byung-hee] Italy's stock and bond markets showed a simultaneous rally on the 3rd (local time). Analysts say this reflects expectations that former European Central Bank (ECB) President Mario Draghi, now appointed as Italy's Prime Minister, will overcome the current crisis.

The FTSE MIB index of the Milan Stock Exchange in Italy closed at 22,527.90, up sharply by 2.1% compared to the previous trading day. This rise was more pronounced compared to other European stock markets such as the UK (down 0.14%), Germany (up 0.71%), and France (unchanged).

Italian bonds also showed strength. The 10-year government bond yield closed at 0.59%, down 0.06 percentage points from the previous trading day. Bond yields move inversely to prices. The yield on safe-haven German government bonds rose, and the yield spread between German and Italian government bonds approached its lowest level in five years. The narrowed yield spread indicates that Italian government bonds are being perceived as safe assets.

The appearance of former ECB President Mario Draghi was welcomed by the Italian financial market. On the day, Draghi was entrusted with the mandate to form a coalition government by Italian President Sergio Mattarella. Draghi will meet with key political figures to negotiate the coalition formation. If an agreement is reached, Draghi will be appointed Prime Minister.

Germany-Italy 10-Year Government Bond Yield Spread Trend [Image Source= The Wall Street Journal]

The coalition government led by former Prime Minister Giuseppe Conte collapsed last month. Conte resigned on the 26th of last month. The coalition he led had disagreements over how to use the 200 billion euro emergency support fund provided by the European Union (EU) to help respond to COVID-19. The coalition fell apart when the 'Italia Viva' party, one of the three parties in the coalition, declared its exit.

Italy's government debt-to-GDP ratio is expected to have exceeded 150% last year. Additional fiscal spending is necessary due to COVID-19.

Draghi was the head of the ECB during the Eurozone debt crisis in 2012. Based on that experience, there are expectations that he will efficiently utilize the support funds for the current crisis. The Italian government must notify the ECB of its fund usage plan by April.

Since Draghi served as ECB President for eight years, there is also an expectation that the future Italian coalition government will maintain a good relationship with the ECB.

Azura Gelpi, an analyst at Citigroup, said, "Draghi is a figure with international recognition," adding, "He has proven his ability to manage financial crises and deeply understands key issues related to Italy and the banking sector."

However, the possibility that Draghi may fail to form a coalition government is considered a variable. The Five Star Movement, the largest faction in the existing coalition and currently holding the most seats in both houses of parliament, opposes Draghi's appointment as Prime Minister. The far-right party Lega, which holds the most seats among opposition parties, prefers early elections based on its lead in public opinion polls.

Sebastian Galli, investment strategist at Nodea Asset Management, said, "If coalition formation fails, demands for early elections will arise," adding, "Although the possibility is still low, considering the unpredictable nature of Italian politics, the possibility of elections cannot be ruled out."

This content was produced with the assistance of AI translation services.