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The Italian Government Needs A Shakeout - Tyson

posted 30 Sept 2013, 07:26 by Mpelembe   [ updated 30 Sept 2013, 07:27 ]

So it's time to play it safe on both sides of the Atlantic. The US heads for a shutdown and Italy's government teeters on the brink. Rome sees benchmark yields on course for their biggest one-day gain in three months as investors head for the havens. Phil Tyson, Rates Strategist at ICAP, saysItaly has been held back by politic paralysis and been on the brink for a while. He says perhaps it does need a shakeout and that's exactly what we're going to get.


PHIL TYSON: "It might not be that long, actually. I mean obviously we've seen political uncertainty increasing. And now that Berlusconi has withdrawn his support, we've got this confidence vote coming up on Wednesday. I think though that even if Prime Minister Letta loses his confidence vote on Wednesday, the president's determined to try and sort of cobble together some sort of coalition maybe with some disaffected members of Berlusconi's own party who have indicated that they're not completely happy with the direction he's taking policy in. So, that could mean that we could see some limited upward pressure on yields towards that 5% level, maybe even a little bit further. But I don't think we're at the stage where we're going to see a complete breakout towards the sort of 7% levels we were seeing at the backend of 2011, beginning of 2012, because the whole of the euro zone seems a lot more stable now with the OMT in place."

JOURNALIST: "Right. And I was going to ask- yes, it seems like a long way to go back to 2011-2012. But everyone clearly still has faith in the ECB's backstop, right?"

PHIL TYSON: "Exactly yes. And you know this could be the point at which it comes under its first sort of true test because, at the moment, everyone's sort of taken Draghi and the ECB at the word that they were going to defend peripheral spreads. But you never know, you never know what's going to happen in Italian politics. I have my doubts about just how effective it's going to be when it has to kick in. But at the moment, the markets believe it and that's the crucial thing, and that's what could keep spreads relatively contained for now with limited upward pressure."

JOURNALIST: "You know I know you look more short term when we look at the markets. But Reuters Breakingviews did a piece today that said, look, ultimately this might be good for Italian politics. It might be good for the markets because this is going to be the shake-up, the perfect storm that this country needs. So further out, it's going to be a 'buy'. Do you agree with that?"

PHIL TYSON: "Well, possibly. I mean I think that the government's been in the brink for a while since the whole Berlusconi trial thing erupted. And I think that it does need a shakeout. They do need electoral reform and I think the President is determined not to have to sort of vote for another government which resulted in the sort of stalemate that we've got back in February under the current electoral system. They want to get electoral reform done first and that's why they're going to get a coalition in place. So ultimately, it could in the short run be good for Italian politics because their whole reform process has been held up, and markets such as Spain are benefitting from that because at the moment the macro environment seems to have improved. They're doing the right thing. Italy has been held back by this politic paralysis. So maybe it does need a shakeout and we're going to get that."

JOURNALIST: "You mentioned Spain. Let's compare Italy and Spain. The fundamentals and structural issues seem- they seem to be getting to grips with it there. The spread is, what, 10 to 15 basis points now. How wide could that go?"

PHIL TYSON: "Potentially, if we see the BTP spread move- 10-year BTP level move up towards the 5%, we could see the spread move out further in favor of Spain from the current sort of 10 to 15 basis points under towards 50 basis points maybe, or maybe even a little bit further. But we've got to remember that back in the end of 2011, beginning of 2012, the spread really ballooned out. We saw it over 100 basis points in Spain's favor moving towards 150. So there's a lot of potential there. But for the moment, I'll expect any spread widening to be relatively capped."