Italian Stocks Crash Most In 2 Years, Bond Yields Soar Amid Budget Deficit Liquidation Panic

After yesterday’s last minute decision by Italy’s ruling coalition to boost the country’s 2019 deficit to 2.4% of GDP, a number that challenged Brussels and its demands for a deficit no greater than 2.0%, we said that it was only a matter of time before the market freaked out as Italy is now on collision course with Europe, and that time came this morning when traders dumped Italian assets en masse, as Italian markets, bank stocks and bonds all tumbled in unison as deputy premier Matteo Salvini vowed to “press ahead” with a budget plan including a deficit that would be three times larger than the deficit under the previous administration.

Italy’s FTSE MIB stock index tumbled to session lows, down 3.7%, after opening sharply lower and failing to find a floor so far; this was the biggest intraday drop for Italian stocks since June 2016, with several banking stocks halted limit down.

The worst performing sector were Italian banks, with the FTSE Italia All-Share Banks Index falling as much as 5.3%, most since May; the biggest decliners were Banco BPM -6%, UBI -4.7%, UniCredit -3.9%, Intesa -3.5%, with most of them being halted, limit down amid the selling chaos.

The bond market was not spared, with Italy’s 10Y bond in freefall, sending the yield some 36bps higher to 3.25%…

… surpassing the highest levels hit during the recent two Italian liquidation panics.

Italian debt had been volatile in recent days, but rallied for much of September in anticipation economy minister Giovanni Tria would reel in the government’s spending plans. That failed to happen last night when Tria capitulated to demands by Salvini and Di Maio to boost the deficit in line with populist promises for basic income which would cost some €10 billion.

Aberdeen Investments’ James Athey said he did not believe the Italian sell-off would necessarily start to “feed on itself” just yet. Nonetheless, he said investors would need greater compensation for holding Italian debt given the higher borrowing levels implied by the new budget, adding that the mood has clearly changed.