• GB Davis

ITA Sovg Spreads Set to Widen - 5/7/20

  • Leading into the summer of 2015, we brought the morass that was the Italian banking sector to our gentleman (and woman) readers' doorsteps. We went through the Monte Paschi (Sienna). - and then carnage.

  • Then on May 24, 2018, we brought the ITA / EU political interplay to your desk via Stratfor:

  • "Stratfor has long asserted that Italy is an important country to watch for the rise of populist and Euroskeptic political forces. The country's recent general election was a victory for these forces, and now Italy is close to having a government that opposes EU fiscal rules. In our 2018 Annual Forecast we said that the next administration in Rome would push to renegotiate the European Union's economic governance."

  • Then on May 28, 2018, we brought ITA and Monte Paschi back front and center again, commenting that:

  • Political crisis in Italy revives fear of a euro-zone meltdown (a bit dramatic, but this are real ITA bond yield movements)

  • Italy president names ex-IMF official, economist Carlo Cottarelli, as interim PM to form government 

  • ITALY'S PM-DESIGNATE SAYS IF DOESN'T WIN CONFIDENCE, ELECTIONS WILL BE AFTER AUGUST - RTRS

  • Carlo Cottarelli, a former IMF senior official has been given a mandate to form a government. It’s very unlikely he will find a workable parliamentary majority, though. #Italy

  • The 5 Star Movement, League, Brothers of Italy and Forza Italia will almost certainly vote against #Cottarelli. Together they hold an overwhelming majority of seats.

  • ITALY'S COTTARELLI: CONTINUED EURO MEMBERSHIP REMAINS ESSENTIAL

  • Italy 2-year bond yields set for biggest one-day jump in almost six years 

  • 10-YEAR YIELD RISES 23BPS TO 2.67% (UP MORE THAN 30BPS SINCE THE OPEN) - BBG

  • ITALY'S BANK INDEX ALSO COMES OFF DAY'S LOWS, DOWN 4.1 PCT: RTR

  • PASCHI -6.40%; intesa, ubi, bpe, bpm halted

  • On May 29, 2018, we noted Yield Curve inversion for ITA

  • On May 30, 2018, the Wall Street Journal printed a good article, "Then and Now: The Italian Crisis in Seven Charts".  Also, ITA Bond Yields rose to '13 highs.

  • On July 20, 2018,  Italian Prime Minister Giuseppe Conte visited Washington, D.C., to meet with U.S. President Donald Trump

  • On October 27, 2018, the EU ended its QE program, admist much uncertainty over ITAs 2019 budget on the periphery

  • On November 24, 2018, we relayed Strator's, "The Political.Consequences of a Weakening Italian Banking Sector"  

This Week

  • Bank of England (BoE) DID NOT make any further increases to its QE (set to hit its pledge of 200 billion pounds by July) while Moody's sees this pushed until June 18 and 100 billion pounds (add'l) at such time

  • You saw the interplay in the German courts questioning the Constitutionality of ECB / EU QE? an ultimatum was given: 3 months for the ECB to justify the program, or the German central bank will be banned from participating - (and now watch what happens to the GER Bund from here to year end) and Conte pushing right back with rhetoric stating the ECB be can do whatever it wants and is not beholden to any court; and this is why:

  • On the Sovereign front, Moody's TRACKING CDS movement, and implied Senior Ratings "adjustments" note that in just the last week, the Governments of France, the UK, Germany and Spain saw CDS tighten enough to imply a rating increase (i.e. betterment) for these countries. Same for Deutsche Post AG, Natixis, UniCredit Austria, Swedbank - notably absent from those gold stars? Italy.  At the same time, utilizing the same methodology, Moody's sees the Italian Government having a lower senior sovereign credit rating of Ba2 - and it's only a matter of time - Italy could be downgraded as early as tomorrow (5/8) - setting the stage for more volatility, widening credit spreads and risk-off while GER and ITA go at it. Fitch recently placed ITA one notch above junk in late April. Note: pushing ITA into definitive junk territory off the last rug of IG eliminates certain holders of this debt - the debt could be dumped.  The ECB has been a buyer of Greek debt below investment grade, so there is precedent, but there was no GER ultimatu

m at such time.

  • Next week:

  • On Monday (5/11), ITA releases Industrial Production for March, Moody's forecasts -20% print, markedly worse than their forecast for the EU of -13%, also worse than either France or Germany.  So whether Moody's downgrades ITA to junk on 5/8, or next week, or sometime in May - people will start to front run this trade; and we shall watch on the sidelines what happens to credit spreads and volatility.

  • Key Metrics to Stay Abreast of on this topic:

  • Absolute ITA Yields

  • The Spread between German Bunds and ITA Sovg Yields

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