MILAN, Feb 3 (Reuters) - Italy's borrowing costs fell sharply on Wednesday after former European Central Bank chief Mario Draghi accepted the task of trying to form a new government and said he was confident of securing sufficient backing in parliament.
After receiving a mandate from President Sergio Mattarella, Draghi said he hoped for unity from political forces as well as society at large. He said he would return to Mattarella to tell him of the outcome of his talks, without giving a time frame.
After weeks of political uncertainty, markets cheered the prospect of the trusted former central banker taking over at a time when Italy is grappling with the resurgent COVID-19 pandemic and its worst recession since the end of World War Two.
"Draghi will face obstacles in forming a new government but I think he will succeed. Italian MPs do not want to go to new elections," said Althea Spinozzi, fixed income strategist at Saxo Bank. She did not expect new national polls but said they were a possibility.
Italy's 10-year bond yield was last down 6.5 bps to 0.589% after touching its lowest level in two weeks at around 0.55%.
The closely watched gap between Italian and German 10-year bond yields fell to 104 bps from 113 bps late on Tuesday , the lowest level in two weeks.
German 10-year bond yields were around 2 bp higher on the day at -0.467%, hovering around their highest level in three weeks. German 30-year bond yields rose to their highest since September at around -0.04%.
"We expect more tightening (in the Italy-Germany yield spread) to occur if Mr. Draghi is confirmed as prime minister, with the 100 bps mark easily within reach," UniCredit analysts wrote in a note to clients.
"However, the outcome is still highly uncertain and BTP strength should be treated with caution as it is ultimately tightly linked to the political situation."
As head of the ECB, Draghi was widely credited with pulling the euro zone back from the brink of collapse, pledging in 2012 at the peak of Europe's debt crisis to do "whatever it takes" to save the euro.
It was not initially clear which parties in the fractured Italian parliament would support an administration headed by 73-year-old Draghi.
"Draghi's success, and therefore the sustainability of the rally in Italian bonds, depends on a broad agreement among political parties on the government's agenda. M5S, the largest party in parliament, already said it opposes the idea," said ING senior rates strategist Antoine Bouvet.
Markets displayed little reaction to euro zone inflation that rebounded by much more than expected in January, a flash estimate showed on Wednesday.
After a flurry of euro zone government bond sales on Tuesday, Portugal launched a new 30-year bond via syndication on Wednesday.
(Reporting by Sara Rossi in Milan and Dhara Ranasinghe in London; Editing by Catherine Evans)
