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The Italian right-wing Lega party denied reports that it's seeking a 250 billion euro ($ 296.16 billion) debt write-off if it becomes part of a power-sharing deal with the anti-establishment Five Star Movement (M5S).
Lega and the left-wing M5S have been locked in negotiations for more than two months, trying to find a political deal that would allow them to jointly govern Italy. This comes after a stalemate at national elections back in March where no party gained enough votes to go it alone.
According to the Huffington Post Italy, which cited a draft of their negotiations dated May 14, the two parties were seeking to ask the European Central Bank (ECB) for a debt haircut of 250 billion euros. It also included a request for a mechanism that would allow member states to exit the euro zone. However, an economics spokesman for Lega denied Wednesday that the request was ever in the draft program.
The report drove Italian borrowing costs higher earlier on Wednesday morning, meaning investors grew concerned about lending to the country's government. The yield on the 10-year paper hit a two-month high at 2.003 percent and the two-year bond yield also rose to 0.007 percent. Investors have been monitoring the political developments in Italy on concerns that a populist government will bring further fiscal slippage. Italy is the euro zone country with the second-highest level of public debt at about 130 percent of its GDP (gross domestic product).
Following Lega's comment, the 10-year bond yield slipped from two-month highs. Speaking on Wednesday morning, Lega leader Matteo Salvini said that he is not intimidated by changes in bond yields.
During a Facebook live session, Salvini said that there's been a lot of progress in talks with M5S, adding that the government program should be completed by the end of Wednesday and the new executive should be formed by Monday at the latest.
The Italian banking index was down 3.7 percent by early afternoon in Europe and was on track for its worst day in five months.
Nomura anaylsts said in a note Wednesday that investors should "always take care when reading into draft documents."
"At this stage both sides are still in a negotiation … Expectations are for an agreement sometime towards the end of this week," the said.
The two parties, which asked the Italian president Monday for a few more days to reach a compromise, want changes at the European level. The anti-establishment parties are hoping for a relaxation of EU fiscal rules, including the 3 percent threshold for a public deficit.
Prior to the run-up to the March election, the M5S began advocating for an Italian exit from the euro zone. However, under the leadership of Luigi di Maio, the party has dropped such a call.
Nonetheless, Brussels has already began sending warnings to the two Italian parties. European Commission Vice President Valdis Dombrovskis told Politico Monday that Italy must continue respecting European commitments, regardless of who's in power.