LONDON • Chaos ruled Italian markets yesterday as the nation plunged deeper into political turmoil.
Yields on Italy's two-year bonds surged to their highest in four years in holiday-thinned trading, while stocks slumped for a fourth day as President Sergio Mattarella asked economist Carlo Cottarelli to form a government to pave the way for new elections due as early as autumn.
Earlier, League leader Matteo Salvini had said it made no sense for Italy to remain in the European Union unless the bloc rewrote its rules.
Italian assets surged earlier in the day after Mr Mattarella vetoed populist leaders' choice of eurosceptic candidate Paolo Savona for finance minister. The anti-establishment Five Star Movement said it was considering proposing impeachment of the President, while the League's Mr Salvini reiterated supporting Mr Savona's candidacy and made a thinly veiled call for fresh elections.
"The relief rally turned into a sell-off" in Italian bonds, said rates and derivatives analyst Rene Albrecht at DZ Bank in Frankfurt.
"This was mainly due to comments such as Salvini saying he wants to stick with Savona for finance minister and discussions on new elections.
"There's a high probability that Five Star and the League could get a majority again, and we would be back at this point where we get a government which wants to spend a lot more than they earn and clashes with EU rules."
Two-year yields doubled to 0.99 per cent from last Friday before being quoted at 0.96 per cent in the late afternoon, while 10-year rates climbed 23 basis points to 2.7 per cent. Italy's main stock index fell 2.4 per cent after surging at the opening.
Italian bank stocks slumped 4.89 per cent, their lowest in 13 months.
Mr Mattarella became the target of populist rage when he said he rejected the choice for finance minister for the good of the country and the financial "savings of families" that had been endangered by rising bond spreads and market concerns.
Last Friday, Moody's put Italy's credit rating on review for a possible downgrade, citing risks to its fiscal strength from the government plan put forward by the populists.