Italy Bonds Fall as Populist Pact Throws Up Uncertainty

(Bloomberg) -- Italian bonds slumped amid a report that populist parties struggling to form a government would seek a debt write-off involving billions of euros.

The yield on benchmark 10-year notes climbed above 2 percent for the first time since March after Huffington Post reported that talks between the Five Star Movement and the League include plans to seek a 250 billion euro ($296 billion) debt write-off from the European Central Bank. The two parties dismissed the story in a joint statement.

However, League lawmaker Armando Siri said the proposal is still being discussed by the party and Five Star. Siri, who is economic adviser to League leader Matteo Salvini, said an exit from the euro is no longer being discussed.

“This is all fairly disruptive stuff for Italian bonds,” said Jason Simpson, a strategist at Societe Generale SA. “The markets had been assuming that they would tone down some of their more radical views.”

The yield on benchmark 10-year notes climbed 2 basis points to 1.98 percent after touching 2.04 percent earlier. The spread over similar maturity German bunds touched 140 basis points, the widest since March 26.

A debt write-off would go against EU law prohibiting central-bank financing of governments. An ECB spokesman declined to comment on the leaked draft.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net.

To contact the editor responsible for this story: Ven Ram at vram1@bloomberg.net.

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