As Italy’s technocratic party prepares to exit , I asked Cosimo Marasciulo, Pioneer’s Head of European Government Bonds and Foreign Exchange, for his thoughts on pending elections in 2013 and how they might affect investors. I’ll share a few of those thoughts with you here:
Q: Would the return of a “political” government undermine Italy’s recent fiscal efforts?
A: We have continuously argued that a deal with the EU to conserve all of these fiscal efforts would have been welcomed by investors, but this would have amounted to a request for aid, which Italy did not need (more than other EMU members). Investors may now show some caution in relation to Italy, which may push up spreads, but we do not foresee any further speculation. Even though some things are yet unfinished, budget consolidation and reforms have been enacted. Moreover, the ECB may have received less attention of late, but it is still there to monitor and limit any dramatic increase in volatility. We are watching events closely and looking for an attractive entry point, should yields and spreads rise.
Q: Sovereign spreads have increased sharply. Could Italy’s crisis bring back global risk aversion?
A: Spreads fell so sharply that they suggested reduced concerns, not only for Italy, but also for the overall debt crisis. We often look at 10-year spreads, but if we looked at how much yields have fallen at the shorter end of the curve (500 bps for 2-year BTP), one would be almost convinced that the EU managed to resolve the whole issue (which is not the case, as long as EU summits end up with the usual muddling through). The efforts of individual countries, notably Italy, helped keep spreads low, and investors should not be overly concerned about a reversal in spreads.
Q: Do you have any forecast on the post-election political scenario?
A: Italian politics are not easy to understand, and even less so in the current situation. Most polls say the Center-Left is the front-runner after picking its own candidate. We think that holding the elections in February would reduce the uncertainty. The financial markets would favor a scenario that keeps the much-respected outgoing Prime Minister well within the ranks of economic policy makers.