This one from Credit Suisse’s Andrew Garthwaite:
We believe that the reasons investors have targeted Italy are: (a) last week’s fiscal proposals were a bit disappointing (€40bn of tightening but mostly post March 2013 elections); (b) the issue of Fininvest trying to limit paying its fine limits credibility of the government; (c) if investors are looking to hedge against the Euro sustainability, then CDS are no longer seen as worthwhile (there could be a non-CDS triggering default) and thus they short Italian bond spreads.
Basically we believe that Italy is being used as a liquid proxy on a Euro breakup view. We would rather recommend (and our fixed income team agrees) long Swedish bonds against French bonds (Sweden is not part of the Euro, government debt c50% of GDP, a nearly balanced budget, current account surplus of 6% of GDP, net foreign debt of only 15% of GDP, cheapish currency on PPP while France pays the bill for peripheral Europe and has a much worse budget and government debt-to-GDP ratio) as a macro trade were the Euro to break up.
(emphasis ours)
In terms of worries over Italy’s finances — Garthwaite might be missing an element of key risk here. Italian government bonds and bank stocks were actually rallying at pixel time on this statement from the finance minister, Giuliano Giulio Tremonti:
RTRS-ITALY’S FINANCE MINISTER TREMONTI SAYS COMING BACK TO ITALY FROM BRUSSELS TO FINISH JOB ON AUSTERITY PLAN
Tremonti’s a popular politician in Italy (more so than Berlusconi, who’d of course threatened to fire him last week) so we do think there’s a “Tremonti effect” here. Who knows what happens if the hands on the tiller are Berlusconi’s and not Tremonti’s, anyway.
But about this idea of Italy as the euro break-up trade. (Thus it’s conversely the fiscal union/Eurobonds trade too?)
Interestingly enough quite a few of Garthwaite’s “positives” for Italy are that it might survive a euro break-up reasonably intact, compared to other economies. Essentially, lower (not necessarily low) levels of net external debt which would therefore not rise as much under a depreciated neo-lira, as well as relatively modest borrowing by Italian banks from the ECB (2.5 per cent of Italian GDP, versus Greek banks borrowing almost half of Greek GDP).
At the complete other end of the scale though, we have Nomura’s European rates strategists calling for Italian bonds to trade wider than Spain. Well — 10-year bonds in both sovereigns are yielding above 6 per cent at pixel time.
Oh, and about the attractions of cash versus CDS… it does make sense, but the latter was in rude health on Tuesday in fact. Italy credit spreads hit 340bps earlier, according to Markit.
Related link:
Is fiscal union the only answer? – FT Alphaville