Italian Prime Minister Mario Draghi resigns

Italian Prime Minister Mario Draghi handed in his resignation to President Sergio Mattarella on Thursday after his unity government fell apart, plunging the country into political turmoil and hitting financial markets.

Mattarella’s office said in a statement that the head of state had “taken note” of the resignation and asked Draghi to remain in a caretaker capacity.

The statement did not say what Mattarella would do next. Political sources said earlier this week that he would likely dissolve parliament and call early elections in October.

Mattarella plans to meet the speakers of both houses of parliament on Thursday afternoon.

Italy’s coalition crumbled on Wednesday when three of Draghi’s main partners snubbed a confidence vote he had called to try to end divisions and renew their fractious alliance.

The political crisis has up-ended months of stability in Italy, during which the respected former central banker Draghi helped shape Europe’s tough response to Russia’s invasion of Ukraine and boosted the country’s standing in financial markets.

Italian bonds and stocks sold off sharply on Thursday just as markets were bracing for the first interest rate hike from the European Central Bank since 2011.

In early trade, benchmark 10-year Italian bond yields soared over 20 basis points to their highest in over three weeks and Italian stocks (.FTMIB) opened down 1.8%.

“It is a big blow to Italy’s ability to deliver policies and reforms over the near term,” said Lorenzo Codogno, head of LC Macro Advisors and a former senior Italian Treasury official. “There will be delays and disruptions with early elections, and most likely no budget by year-end.”

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COALITION FRACTURES

Draghi had already tendered his resignation last week after one of his partners, the populist 5-Star Movement, failed to back him in a confidence vote on measures tackling the high cost of living.