Italy is thinking about taking a $250 billion write down and that has traders starting to freak out about Greece
- Huffington Post Italia leaked a government proposal late Tuesday that showed populist parties drafted plans to ask the European Central Bank for debt forgiveness of 250 billion euros.
- Italay's 10-year yield hit its highest level in two months following the report.
- Bond yields in other eurozone countries also spiked, with the Greek 10-year rising 25 basis points.
Eurozone bond markets turned chaotic Wednesday after leaked documents suggested Italian coalitions who are paving the way for a new administration were floating plans to ask for 250 billion euros in debt forgiveness for the country.
The cost of borrowing in Italy hit its highest level in two months, with the 10-year bond yield jumping 14 basis points (bps) to 2.082% - its biggest daily move in nearly a year. The 2-year was up 17 bps to 0.11%.
Meanwhile, the spread between German and Italian 10-year bond yields, an indicator of financial stress in the eurozone, was up 129 bps to 144 bps.
Huffington Post Italia leaked late Tuesday a proposal by the anti-establishment Five Star Movement and the far-right League - populist parties who came out on top of an inconclusive March election - outlining a plan to ask the European Central Bank to bail the country out of 250 billion euros ($295 billion) in debt.
The 39-page document also pointed to possibly establishing a way for countries to leave the euro, a proposal floated by the parties in the past.
The Five Star and the League released a statement hours after the draft was published saying it was "old-version that has been significantly modified." They specifically pushed back on the euro blueprint, saying they decided "not to call into question the single currency."
Still, the prospect of an Italian debt write-down is roiling vulnerable eurozone bond markets. Spanish and Portugese 10-year bond yields climbed nearly 3 basis points each.
Perhaps most troubling, the 10-year bond yield in Greece climbed 25 bps to 4.36% - its highest level in over a month and just 5 bps below the 2018 high.
Greece, which has received three financial bailouts since 2010, has been seeking relief from national debt that has piled up to more than 195% of gross domestic product. Even after significant economic reforms, the country is still "vulnerable to shocks," according to a recent survey by the Organisation for Economic Co-operation and Development.
Meanwhile, contagion risk doesn't seem to have spread to the euro just yet. While the euro fell to its lowest level this year at 1.1764 versus the dollar on Wednesday, the drop was small relative to bond market movements and could be linked to tepid inflation data.
That could be - in addition to the parties walking back a euro exit plan - partly because the market is expecting further changes to the agreement.
"EUR/USD is yet to meaningfully react this morning," Nomura analyst Jordan Rochester wrote in an email. "The full contents of the current draft are known only to the two sides and it is yet to be finalised and has scope to change again."