Draghi Says Italy's Populist Push Propelled Consumer Loan Rates

(Bloomberg) -- Mario Draghi insisted that populist rhetoric by Italy’s new government has been driving up borrowing costs for households and companies even before the cabinet approves its first budget law.

The administration’s talk of expensive spending plans “did have an impact,” the European Central Bank president told lawmakers in the European Parliament in Brussels on Monday.

“Households and companies are now paying higher rates than before, as result of the statement,” he added without saying which specific set of data he was referring to.

Draghi’s comments Monday were in line with what he said earlier this month after a meeting of the ECB’s Governing Council. At that time, the ECB president said “words have created some damage” in Italy and interest rates have gone up for households and companies.

Italian Finance Minister Giovanni Tria is being squeezed between investor demands to uphold European Union rules and demands for extra spending by the leaders of the ruling coalition. He is preparing to submit an update to forecasts and fiscal targets for cabinet approval this week.

Constant Speculation

Tria has been the subject of repeated speculation over his future. The Finance Ministry denied this month reports that he threatened to resign amid pressure from the Five Star Movement to approve funding for its costly basic-income scheme.

Italian bond yields rose in the run-up to the formation of the new administration led by Prime Minister Giuseppe Conte and showed high volatility in the government’s first two months in office. Before the coalition was formed, investors were unnerved by the risk of early elections that would have been seen as a referendum on euro membership.

Then concerns mounted amid uncertainty over the way the new administration intends to finance its sweeping spending measures.

“The evidence that we had before is that from April onward, given the fall of the value in their securities, the banks have increased the interest rates by about 20 basis points, particularly by making loans to small and medium-sized companies,” Draghi told lawmakers on Monday. “The large companies that issue bonds have seen their costs go down -- 60 basis points on the bond issues of the larger companies.”

There could still be a further fallout on interest rates depending on the budget targets unveiled by the government this week. A negative response by investors could push sovereign yields higher, with implications for Italian banks, which are large holders of the nation’s debt.

“Another important point, is not only bank interest rates have gone up, but demand for guarantees have become more demanding and contractual clauses have become more demanding,” Draghi told the EU parliament. “So that’s the situation.”

©2018 Bloomberg L.P.