Draghi Shrugs Off Italian Contagion Fears After `Local Episode'

(Bloomberg) -- European Central Bank President Mario Draghi played down concerns about contagion from the Italian political turmoil after the formation of a government backed by two populist parties, saying uncertainty in his country is just one of the existing risks in the euro region.

“We’ve seen a significant rise in sovereign yields on the back of political
uncertainty around the end of May,” the ECB president said after his Governing Council met on Thursday in Riga, the capital of Latvia. “Those yields are currently at more elevated levels compared to our last meeting in April, but not as elevated as they were in the immediate aftermath of these events.”

“Contagion was not significant if any, if at all. It was a pretty local episode,” he added, without specifically mentioning the word “Italy.”

Draghi challenged suspicions about why the ECB lowered the share of Italian government bonds last month, denying that it had an impact on higher yield levels. There is “no conspiracy here,” he said with a smile.

Italian government bonds rose after Draghi’s comments, with the 10-year yield down to 2.74 percent as of 4:09 p.m. Rome time. The yield spread with the equivalent German bunds was down 3 basis points to 229 basis points.

Repeatedly prompted by reporters to comment on what he and the council make of the new administration in Rome whose members in the past strongly criticized the European monetary union, Draghi insisted that the euro is irreversible and declined to comment on a redenomination risk.

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“It really doesn’t pay at all to discuss the existence of something which is irreversible,” he said.

Investor concerns in Italy have centered around the country’s future in the euro area after the Five Star Movement and the League -- two euroskeptic parties -- formed a coalition, blowing out the premium demanded by investors to hold its bonds. On Monday, bonds and stocks surged, with the euro rallying, after new Finance Minister Giovanni Tria made assurances that the country would stay committed to the shared currency.

When asked about the impact of the Italian situation on the euro region’s economic outlook, he said that “as far as how specific risks may have an impact, we see some volatility that has receded.”

“At this point in time, we have a variety of risks and this is just one of them which is definitely less than it was two weeks ago,” the ECB president said.

©2018 Bloomberg L.P.

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