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Italy Bond Yields Surge in Confrontation with ECB President Mario Draghi

Thu, Oct 18, 2018 - 1:02pm

italyMario Draghi warned, "Undermining E.U. budget rules carries high price for all." Then, Italian bond yields surged.

Draghi did not mention Italy by name, but his threat Undermining EU Budget Rules Carries High Price For All was well understood by the bond markets.

"Speaking to European Union leaders at a summit devoted to euro zone integration, Mario Draghi said EU budget rules, the Stability and Growth Pact, had to be respected in the interest of all, one official with insight into the summit said.

“There is no evidence that to undermine all the rules will lead to prosperity, but it will carry a high price tag for all actors,” the official reported Draghi as telling 27 EU leaders — all except Britain which is due to leave the EU in March 2019.

“Rules must be respected in the self-interest of all parties, especially the weaker ones,” Draghi told the leaders.

Paper Tigers

France and Spain repeatedly ignore budget targets. Little is said and nothing is done. Germany has a huge account surplus and little is said and nothing is done. Germany itself violated budget rules for long periods of time and little was said, and nothing done.

Italy 10-Year Weekly Chart

italy chart 1

Spread to Germany 10-Year Bond

Germany

Theory vs. Practice

In theory, German, Italian, and Greek 10-year bonds should all have the same yield. In practice, they clearly don't. The difference is perceived default risk.

The odds of Italy leaving the Eurozone are rising.

Read next: Turkey Default Risk Spikes to 2008-2009 Crisis Levels; Possible Contagion, Warns Russell Napier

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