Monti’s Bond Frustrations Mount as Yields Stay High: Euro Credit

Italian Prime Minister Mario Monti
Mario Monti, Italy's prime minister. Photographer: Jock Fistick/Bloomberg

Italian Prime Minister Mario Monti’s frustrations with the bond market are surfacing as spending cuts destroy growth without the reward of cheaper borrowing costs.

Italian gross-domestic product contracted an annual 2.5 percent in the second quarter as Monti sought to appease lenders by trimming the budget and increasing taxes. Even though Monti will bring the deficit within European Union limits this year, Italy still pays 452 basis points more than Germany to borrow for 10 years, within 67 basis points of the gap at market close on the day when Monti took office, Nov. 16.

Monti, with eight months left to serve, is campaigning to prevent a bailout on his watch. In June, the former university president joined forces with Spanish Prime Minister Mariano Rajoy, also resisting a rescue, to ease requirements on countries that request aid.

“The longer Rajoy holds out the more you’re going to see bleeding in Italy,” said Mujtaba Rahman, an analyst at Eurasia Group in London. “And that’s why I think you’ll see more pressure from Monti” and others, he said.

Monti was forced this week to assure German lawmakers he still believed in democracy and apologize to his predecessor, Silvio Berlusconi. As Italian politicians hit the campaign trail ahead of next year’s election, it’s harder for Monti to win support for measures that would boost investor confidence. Abroad, he has been foiled by German resistance to collective action and investor speculation that the fate of Italy, the third-biggest economy in the 17-nation euro area, is tied to that of smaller Spain.

Exit Goldman

Goldman Sachs Group Inc., the fifth-biggest U.S. bank by assets, cut its holdings of Italian sovereign debt by 92 percent to $191 million in the second quarter, after boosting them in the first three months of the year, according to the bank’s quarterly regulatory filing published yesterday. Goldman also increased its credit-derivative positions on Italy in the quarter, pushing its total market exposure to Italian government and non-government securities to negative $977 million from positive $2.4 billion in March.

The Italian cabinet held “lengthy” discussions on a possible request for bailout funds to buy its bonds, Education Minister Francesco Profumo said in an interview with Bloomberg News yesterday. He later issued a press release saying “there wasn’t a long discussion.”

Bolder Action

Monti outraged German politicians with an Aug. 5 interview in Der Spiegel magazine where he said European leaders need to show more independence from legislatures. Bolder action to fight surging borrowing costs is needed, he said, such as backing his call for the euro region’s permanent rescue fund to secure a bank license, boosting its fire power.

A day after releasing a statement saying he still believed in democracy, the Wall Street Journal released a month-old interview where Monti said that Italy’s yield premium to Germany would be 1,200 basis points if Berlusconi, who sustains his non-political government, were still in power. Prior to Monti’s apology, a senior member of Berlusconi’s People of Liberty Party threatened to topple the government.

Monti’s slight to Berlusconi was probably intended and demonstrates the political strength of the prime minister, said Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA, which has about $8.5 billion in assets.

“He wants to do that, exactly to do that, to stress the situation in Italy,” Fiorini said. “I think that he’s trying to isolate Berlusconi.”

Economic Overhaul

Italy’s 10-year yield of 5.9 percent has left the spread about 180 basis point more than the average of last year even after Monti overhauled the pension system, revamped labor laws and imposed austerity on Italians. The government is on track for a budget gap of about 2 percent of gross domestic product this year and will have a primary surplus measured by its deficit minus financing costs, that will help reduce Europe’s second-biggest debt burden from next year. Italy owes more than $1.98 trillion, more than twice Spain’s debts of $886 billion.

“Monti came up with a comprehensive and credible plan on the fiscal side,” said Fabio Fois, an economist at Barclays Capital in London. “Bottom line, when you do fiscal austerity growth is going to suffer. There’s no escaping that.”


The premier had to sacrifice growth to get the country’s books in order with the economy shrinking for a fourth consecutive quarter in the three months through June and unemployment reaching a 13-year high of 10.8 percent. Popular support for Monti and the parties that back him has slumped, with anti-euro forces on the rise.

“We are not euro-carpets on our knees in front of the German border,” Angelino Alfano, secretary general of Berlusconi’s People of Liberty party, said on “Uno Mattina” on Italian state-owned television station RAI, according to newswire Ansa. “When they say ‘Europe asks for it,’ it’s only a way of saying that France and Germany are asking for it for their own specific interests.”

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