Mr. Draghi's resignation came hours before the European Central Bank unveiled a new bond purchase plan to help indebted eurozone countries and prevent financial fragmentation within the currency bloc. That plan comes with conditions "reminiscent of the bad times of the peripheral debt crisis," Mr. Forest said.
The bond purchase plan, called the Transmission Protection Instrument or TPI, can be activated "to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area," the ECB said.
The political uncertainty over Mr. Draghi's resignation "is likely to be reflected in a repricing of political risk into Italian government debt yields going towards elections, and markets may be tempted to test the ECB's resolve on the back of today's announcement" of the new TPI, said Silvia Merler, head of ESG and public policy at Algebris Investments in a separate emailed statement.
Asset managers are also looking for reassurance that Italian politics won't disrupt European Commission initiatives like Next Generation EU, the economic package to help member states recover from the pandemic. Next Generation EU is worth €750 billion ($763.7 billion) and Italy is in line to receive around €20 billion in another tranche of those funds, if certain conditions are met.
"In a rising rates environment, with the prospect of a colder winter and a possible recession, whichever coalition wins the next election, room for maneuver will be limited," said Filippo Alloatti, head of financials (credit) at Federated Hermes, in a separate emailed statement.
Italy's political crisis "is significant to markets," said Andy Mulliner, head of global aggregate strategies at Janus Henderson.
"Ultimately previous periods of extreme stress in the spread have come hand-in-hand with political instability," he said in an emailed comment. As right-wing parties rise in Italian polls, "relations with the EU would be expected to be difficult" and could raise concerns among investors around Italy's longer term future. While not an acute risk, it could mean a wider risk premium attached to Italian debt that would further compound ECB tightening of monetary conditions, Mr. Mulliner said. "Even in the event of a continuity of the Draghi government, spreads are unlikely to move significantly tighter either," he said.
Mr. Draghi maintained his credibility by sticking to a reformist agenda and "remains a plausible candidate for prime minister again in the future," Mr. Alloatti of Federated Hermes added.
Mr. Draghi became prime minister of Italy in February 2021. He served as president of the European Central Bank from 2011 to 2019.
