Italian bonds fell on Thursday on concerns that renewed tensions within the country's ruling coalition could lead to its collapse or a cabinet reshuffle that would see the departure of the finance minister, who is well regarded by investors.
Italy's 10-year sovereign bonds reacted to news reports on Thursday that relations between the two coalition partners, the right-wing League and anti-establishment 5-Star Movement, had broken down and that a rupture could be imminent. The tensions reignited in public on Wednesday after the League voted against a 5-Star motion in parliament to end a major public construction project, a high-speed rail project linking Italy and France.
The motion was lost but the reports in many Italian media outlets say League leader Matteo Salvini is pushing for some ministers, including Finance Minister Giovanni Tria, to be replaced. Tria is an economist who is seen by investors as a bulwark against Salvini's push for more expansionary fiscal policy.
Salvini told supporters at a public rally on Wednesday night that he was not interested in a cabinet reshuffle but suggested it would be better to go to elections if coalition discord reached the point where it could no longer get things done. "It will be a long day (for markets)," a bond trader said, referring to reports that there will be several closed-door meetings between the coalition and government leaders on Thursday.
In a note, UniCredit raised the prospect of early elections if Salvini forced 5-Star into a corner with demands for a reshuffle. 5-Star has more parliamentary seats than the League, but Salvini's party is riding high in opinion polls and is the more dominant political force. "It could be very difficult for the 5-Star Movement to continue to acquiesce to Mr Salvini's demands and thus this might be the last straw, increasing the risk of early elections," UniCredit said, adding that in this scenario a general election could be held as early as October.
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