Fixed income managers are readying themselves for a flight to safety in the European markets as Italy renews its bid to launch what could effectively be a dual currency for the country.
In what was seen as a controversial move, Italy's coalition government - comprised of the hard-right Northern League and the populist Five Star Movement - has proposed the issuance of low-denomination government bonds that would be circulated alongside euros.
The non-interest-bearing treasury bills would be known as mini-BOTs from the acronym of Buoni Ordinari del Tesoro (BOT), or Ordinary Treasury Bonds, and would be smaller than the lowest denomination of standard treasury bonds, which is €1,000. The bonds would be used to pay off the state's debts to companies and individuals.
Head of the European Central Bank Mario Draghi has slammed the proposals, warning it would be illegal for Italy to introduce a parallel currency (as a member of the euro) or alternatively the country would be adding to its debt problem. However, mini-BOTs' application as a means of payment was approved by parliament on 28 May, by all parties.
Credit experts were divided on whether the proposals were paving the way for Italy to leave the EU.
Columbia Threadneedle's Hilton said if those in the Italian government are "[sowing] the seeds of an eventual exit from the eurozone…[by] introducing a home-grown currency" their "objective could certainly be met".
Craig Inches, fund manager at RLAM, agreed if mini-BOTs went ahead "the market would likely view this as a potential path to an eventual Italexit."
Popularity of the euro among the Italian population remains high, and while the [League] may not be content to willingly acquiesce to all of the demands made by the European Commission, they are unlikely to feel an exit from the euro would be in the country's best interests at this point in time.