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Italy Thrown Into Chaos as Draghi Prepares to Resign as Premier

·3 min read
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(Bloomberg) -- Prime Minister Mario Draghi told lawmakers that he would meet with the Italian president Thursday morning, when it’s expected he’ll offer his resignation.

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“Sometimes also central bankers have a heart,” an emotional Draghi told the lower house of parliament.

Three of Draghi’s coalition partners withdrew their support Wednesday night after Draghi forced a confidence vote by threatening to quit. And while Draghi didn’t immediately step down after the failed vote, the move effectively ended the unity government he’s been running since February 2021.

If President Sergio Mattarella accepts the former European Central Bank chief’s resignation, emergency elections could be called for early October, the first time the country would go to the polls in the fall.

Read More: Here Is Why Italy Never Holds Snap Elections Over the Summer

“The only way, if we want to remain together, is to rebuild this pact from scratch, with courage, altruism, credibility,” Draghi told lawmakers ahead of the confidence vote. In the end, three of Draghi’s government allies, the populist Five Star Movement, the nationalist League and the center-right Forza Italia abandoned him.

Investor Jitters

The situation will be closely watched in Frankfurt, where the ECB is set to unveil a new crisis-fighting tool designed to protect highly indebted countries like Italy from speculation.

What Bloomberg Economics Says

The uncertainty is likely to make bondholders increasingly nervous, raising the pressure on the European Central Bank to announce a credible anti-fragmentation tool on Thursday.

-- David Powell, senior euro-area economist. Click here for full note

Italian bonds tumbled on Thursday, sending the 10-year yield surging 18 basis points to 3.57%, the highest since June. German peers are little changed leaving the spread between the pair -- a major gauge of risk in the region -- 18 basis points higher at 232 basis points. FTSE MIB futures slumped 2.9%, strongly underperforming Euro Stoxx futures.

Italian governments are notoriously unstable and Draghi led the 67th cabinet the country has had in just over 75 years. And while Draghi will likely remain caretaker prime minister until the next vote, the government will be dramatically weakened, risking its legislative agenda.

Draghi -- an unelected technocrat picked to lead Italy out of the coronavirus crisis -- has been a reassuring figure for investors during a turbulent time for the euro area. Europeans are bracing for a recession amid rising inflation and an energy crisis fomented by Russia’s war in Ukraine.

Reform Agenda

During his 18 months in power, Draghi devised a plan of reforms agreed with the European Union to free up Italy from red tape and boost competition. That was instrumental for the country to receive 200 billion euros ($204 billion) in aid from the bloc. Failure to pass the proper reforms could put that money at risk.

Paolo Gentiloni, the EU’s economy commissioner, warned “a perfect storm” could lie ahead for Italy.

Italian parties have now entered campaign mode. The center-right, which acted in lock-step during the heated Senate debate Wednesday, has most to win from an earlier vote. Based on current polls, a right-wing tie-up led by Giorgia Meloni’s Brothers of Italy would win a snap election if its members stick together.

Even though Giuseppe Conte’s Five Star triggered the collapse by withdrawing government support last week, its influence is poised to wane. The party’s popularity has plummeted since it entered government and it would likely lose seats in a new election.

(Updates with Draghi quote in the second paragraph)

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