Is Italy at Risk of Leaving the Euro?

According to The Telegraph, nearly 57 percent of the Italian vote went to parties that want to throw away the austerity measures instituted by the European Union as a requirement for assistance. Unsurprisingly, that 57 percent represents a controlling majority of senate seats. Grillo’s Five-Star Movement won 25 percent of the vote itself, and the party has made the return to the lira one of its pledges. Berlusconi’s party has also threatened to pull the country out of the common-currency bloc.

Let that roll around for a moment. Many observers believe that a collapse of the Italian economy would be significant enough to drag down the entire region — and many observers believe that abandoning austerity measures and leaving the common currency would lead to a massive economic downturn.

One of the overriding fears is that without the willingness to comply, the ECB won’t be able to support the Italian bond market through its Outright Monetary Transactions (“OMT) mechanism. The broad European recovery strategy is fragile as is, and opposition could catalyze a destructive unraveling of progress.

As it stands, Italy did manage to orchestrate a successful bond sale after the election. The country sold its target of 2.5 billion euros ($3.27 billion) worth of 3.50 percent BTP bonds dated November 2017 at a yield of 3.59 percent. Italy also managed to sell 4 billion euros ($5.23 billion) of a new 4.50 percent BTP dated May 2023 at 4.83 percent. The yield on the nation’s benchmark 10-year note fell slightly to 4.81 percent.

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