Leaked Italy documents show $250 billion debt write down proposal


FILE PHOTO: A woman walks past electoral posters of the 5 Star's candidate Luigi Di Maio and the Forza Italia party in Pomigliano D'Arco, near Naples, Italy, February 21, 2018.        REUTERS/Alessandro Bianchi/File Photo
PHOTO:Election posters seen in Pomigliano


  • Huffington Post Italia leaked a government proposal
    late Tuesday that showed populist parties drafted plans to ask
    the European Central Bank for debt forgiveness of 250 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 who are paving the way for
a new administration were floating plans to ask for 250 billion
euros 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 (bps)
to 2.082% — its biggest daily move in nearly a year. The 2-year
was up 17 bps to 0.11%.

Meanwhile, the spread between German and Italian 10-year bond
yields, an indicator of financial stress in the eurozone, was up
129 bps to 144 bps. 

Huffington Post Italia leaked late Tuesday a proposal
by the anti-establishment Five Star Movement and the far-right
League — populist parties who came out on top of an inconclusive
March election — outlining a plan to ask the European Central
Bank to bail the country out of 250 billion euros ($295 billion)
in debt.

The 39-page document also pointed to possibly establishing a way
for countries to leave the euro, a proposal floated by the
parties in the past. 

The Five Star and the League
released a statement hours after the draft was published

saying it was “old-version that has been significantly modified.”
They specifically pushed back on the euro blueprint, saying they
decided “not to call into question the single currency.”

Still, the prospect of an Italian debt write-down 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 bps to 4.36% — its highest level in over a month and just 5
bps below the 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
,” according to a recent survey by the Organisation
for Economic Co-operation and Development.

Meanwhile, contagion risk doesn’t seem to have spread to the euro
just yet. While the euro fell to its lowest level this year at
1.1764 versus the dollar on Wednesday, the drop was small
relative to bond market movements and could be linked
to tepid
inflation data

That could be — in addition to the parties walking back a euro
exit plan — partly because the market is expecting further
changes to the agreement.

“EUR/USD is yet to meaningfully react this morning,” 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.”