As Italy’s political turmoil rattles global stock markets, the head of the country’s central bank warned Tuesday that policies embraced by populist parties risk Italy losing the “irreplaceable asset of trust.”
In a speech Tuesday, Bank of Italy Governor Ignazio Visco said any government must adhere to European Union treaties and not increase public debt, or risk an exodus by domestic and foreign investors.
“While it is to be hoped that the goals and the projects of the various political groups will be set with clarity and foresight, together with the plans to achieve them, it would not be wise to ignore financial compatibilities,” Visco said in a speech at the Bank of Italy’s annual meeting.
“[We] cannot disregard constitutional constraints: protecting savings, balancing the accounts and respecting the [EU] treaties. Above all, we must never forget that we are only ever a few short steps away from the very serious risk of losing the irreplaceable asset of trust,” he said.
The remarks were seen as a sideswipe at the 5 Star Movement and League, the euroskeptic parties whose efforts to form a coalition government were essentially blocked by Italian President Sergio Mattarella on Sunday. Both have vowed to challenge EU budget guidelines, as well as to lift fiscal spending and cut taxes, once in power.
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Italy now looks headed for a fresh general election later this year, as Mattarella’s attempts to bring in a government headed by International Monetary Fund veteran Carlo Cottarelli look set to fail in parliament.
The League is already framing a new election as a chance for voters to show whether they back Italy’s membership in the euro — and fears over the possible threat to the long-term future of the eurozone has spooked investors, sending Italian stocks I945, -2.55% and the euro EURUSD, -0.6194% lower and driving Italian bond yields TMBMKIT-10Y, +16.11% higher.
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Investor confidence in Italy would be hit if the EU’s debt restrictions are ignored, Visco warned, noting that a hefty portion of the financial savings accumulated by Italians can eventually be traced back to the country’s €2.3 trillion public debt.
“If the value of their wealth were to be imperiled, they would react by fleeing and seeking shelter elsewhere. And foreign investors would follow suit even more rapidly. The financial crisis that would ensue would put us back significantly. It would taint Italy’s reputation forever,” the central bank chief said.