Italy in Disarray as ECB Pledge Keeps Nation From Brink
Italy’s government is on the verge of collapse and two of its most senior executives have lost the confidence of shareholders. Thanks to Mario Draghi’s promises, bond investors see the turmoil as more of a blip than a crisis.
Yields barely budged yesterday even after Prime Minister Enrico Letta spent the weekend fighting Silvio Berlusconi’s efforts to topple his government. Intesa Sanpaolo SpA (ISP), Italy’s second biggest bank, replaced its chief executive officer and Telecom Italia SpA (TIT) CEO Franco Bernabe is preparing to resign.
Without Draghi “little would have stood in the way of catastrophe,” Nicola Marinelli, who helps oversee $180 million as portfolio manager at Glendevon King Ltd. in London, said in an e-mail. “Italy would be facing very high refinancing rates, difficulties in issuing bonds at auctions, and the clear prospect of going out of the euro or defaulting on its debt.”
Italy’s politicians are benefitting from the unintended consequences of ECB President Draghi’s promise last year to “do whatever it takes” to backstop the euro. While Draghi, the country’s former central banker, is pushing Italian officials to revamp their economy, the pledge has convinced some investors that, no matter how dysfunctional the country becomes, the ECB will bail it out in the end.
The yield on Italian 10-year bonds, which has risen 19 basis points in the past week, dropped 2 basis points to 4.55 percent at 10:18 a.m. Rome time, after a weekend that brought Letta’s coalition to the brink of collapse. That compares with the 7.48 percent record hit in November 2011 when Berlusconi’s last government fell. Draghi unveiled his plan to underpin the currency 10 months later.
“The signalling effect of the ECB’s bond-buying program continues to supress Italian yields,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “As a form of verbal intervention, it has been a smashing success and continues to prop up peripheral eurozone debt markets to varying degrees.”
Italy’s economy has been shrinking since the third quarter of 2011 and is weighed down by the world’s third-biggest debt burden after the U.S. and Japan. The potential government collapse puts fiscal targets at risk, creating “uncertainty at a crucial period when the 2014 budget should be finalised,” Fitch Ratings said in a statement yesterday.
Benchmark companies are also under strain. Intesa Sanpaolo’s CEO Enrico Tommaso Cucchiani resigned Sept. 29 after clashing with some shareholders, while Franco Bernabe, CEO of Italy’s biggest phone company, plans to quit after losing the support of the company’s biggest shareholders, a person with knowledge of the matter said last week.
Intesa shares dropped 3.5 percent yesterday, leading a 1.2 percent drop in Italy’s benchmark FTSE MIB Index. The index was up 0.9 percent at 10:20 a.m. in Rome today.
Most of the attention is on Letta, who leads a fractious coalition cobbled together during two months of talks after inconclusive elections in February.
The fissures that risk bringing his administration down stem from Berlusconi’s legal troubles. His tax-fraud conviction subjects him to expulsion proceedings in parliament, a course that Letta’s Democratic Party allies are pursuing over the objections of Berlusconi’s associates.
He pulled the plug on Sept. 28 and five ministers from his People of Liberty party, including Deputy Premier Angelino Alfano, quit the Cabinet.
Letta defied Berlusconi’s attempts to force early elections and said he’ll request a confidence vote for Oct. 2 to try to save his administration.
“Although the financial markets are accustomed to dysfunctional and unstable Italian politics, the latest bout of renewed tensions is unwelcome at a time when Italy remains entrenched in a severe and prolonged economic downturn,” Raj Badiani, principal IHS Global Insight economist for Italy, said in a research report.
Letta needs 24 votes in the Senate to secure a new majority without Berlusconi, newspaper Corriere della Sera reported. He may gather some of those votes from lawmakers willing to leave Berlusconi’s party, Deputy Finance Minister Stefano Fassina told Bloomberg Television yesterday.
Should he fail, that would likely trigger early elections initiating a new round of political strife, further testing the limits of Draghi’s promise.
“People feel encouraged to buy Italian sovereign debt as long as big old brother in Frankfurt is willing to do that,” Francesco Galietti, founder of Rome-based research firm Policy Sonar, said in an interview. “Draghi’s position is really delicate because on the one hand he has to help Letta, and he certainly is doing so. But on the other hand he has to watch out for German hawks who might consider him as too lenient on Italy.”
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