Monti’s Market Votes Worthless as Berlusconi Gains: Euro Credit
Bondholders would deliver a landslide victory for Mario Monti at this weekend’s election, based on the drop in yields during his premiership. Unfortunately for them, Italy’s voters are less keen.
While Monti’s austerity program has rewarded investors with a 28 percent gain in the nation’s debt since he became prime minister, it is less popular with the electorate. His coalition was in fourth place in the final polls before voting scheduled to end Feb. 25, trailing Pier Luigi Bersani, former premier Silvio Berlusconi and comedian-turned-politician Beppe Grillo.
“The dream outcome would be a Monti-led government,” said Kasper Ullegaard, head of fixed-income at Sampension AS, which oversees about $36 billion in assets, including Italian bonds, from Copenhagen. “We would like a continuation of the current administration which will continue its reforms. That may be a low possibility event, but even a coalition with more Bersani and less Monti is better than the alternative.”
Monti succeeded Berlusconi in November 2011, inheriting two-year yields approaching euro-era highs of 8.12 percent. Now, in what could the final week of his premiership, yields are within 35 basis points of an all-time low at 1.61 percent, helped by European Central Bank President Mario Draghi’s pledge to defend the common-currency bloc.
Berlusconi, who is appealing an October tax fraud conviction, has gained popularity with promises to cut taxes and reverse austerity. The former premier’s rise in the polls reflects growing discontent among Europe’s citizens with spending reductions, with workers from Spain and Greece to the U.K. striking in protest against jobs cuts and wage decreases.
“When it comes down to it people don’t like the austerity,” Steven Major, global head of fixed-income research at HSBC Holdings Plc in London, said. “Monti’s been blindsided by the populist policies and proposals of Berlusconi.”
Italy’s 10-year borrowing costs have climbed 31 basis points since reaching a two-year low on Jan. 25, as the 76-year- old billionaire’s re-emergence stokes concern improved investor confidence in bonds since Draghi’s July 26 pledge to do “whatever it takes” to protect the euro may dissipate.
Under the leadership of Monti, 69, the yield difference between 10-year debt and similar-maturity German bunds has plunged and is now below the target of 287 basis points Monti set in December. It had risen to a euro-era record of 575 basis points in November 2011. The spread, a measure of how much riskier investors perceive lending to Italy rather than Germany is, is currently about 271 basis points.
Italians vote with unemployment at a 13-year high of 11.2 percent and the economy mired in its fourth recession since 2001 after contracting for six quarters through the end of last year.
Against that backdrop, Monti’s austerity measures, including increasing the retirement age and overhauling labor rules, have provided ammunition for his political opponents.
Bersani, 61, who has reiterated the need to continue Monti’s economic approach, has seen his lead narrow to about six percentage points, according to the average of five polls Feb. 8, the day before a polling blackout. That’s down from about 14 percentage points a month earlier.
A survey of voting intentions on Feb. 6 had Berlusconi trailing by less than the 4 percentage-point margin of error.
With the polls published Feb. 8 reporting about 30 percent of undecided or abstentions, investors have underestimated the potential for an uncertain result, according to Michael Riddell, a London-based fund manager at M&G Group Plc.
“The market is being far too relaxed about peripheral political risks,” said Riddell, who helps oversee $324 billion and sold his holdings of Italian debt in January. “Given how I’m positioned, and purely speaking in terms of fund performance versus benchmark, I want the election to be a total mess.”
Italian bonds handed investors a return of 1.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Even if Berlusconi fails to close the gap and win the vote, his gains may prevent Bersani from winning an outright majority in the Senate because Italy’s electoral law assigns seats in that house on a regional basis.
Bersani may turn to Monti to form a post-vote alliance, a move that should help allay bond market fears, according to Georgios Tsapouris, an investment strategist at Coutts & Co, which oversees $49 billion. Coutts owns Italian bonds and would look to increase its holdings should investor concern push prices lower before the election, he said.
“A coalition between the parties led by Bersani with the center parties under Monti should be the most market favorable outcome,” Tsapouris said. “Bersani is generally in favor of the current reform agenda, but Monti’s participation in the new government would increase the government’s credibility that it will implement the structural reforms promised.”
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