Commentators call on ECB to relieve pressure on Italian bond yields
EUROPE - Asset managers have called on the European Central Bank (ECB) to step to the plate as the Italian government bond market comes under increasing pressure, with yields spiralling ever higher.
On Wednesday, after Italian prime minister Silvio Berlusconi announced that he would resign after losing his majority in parliament, yields on Italy's 10-year bonds increase well above the 7% mark.
Nick Gartside, global fixed income CIO at JP Morgan Asset Management, said the news was "very worrying".
"Although the Italian government can operate with yields at these levels for a long period of time, the worrying, and more immediate, impact is on the corporate and banking sector," he said.
"Yields above 7% are unsustainable for banks and corporates and are likely to have a significant impact on the real economy quickly."
He said the ECB was the only actor that could hold down yields in the short term.
Mark Dowding, senior portfolio manager at BlueBay Asset Management, said Berlusconi's resignation had exacerbated the country's problems, but he also had strong words for German chancellor Angela Merkel and French prime minister Nicolas Sarkozy.
"For Merkel and Sarkozy to openly mock Berlusconi, as they did at a recent Euro summit, has served to undermine confidence in the country as a whole in the eyes of international investors," he said.
"In addition, the half-hearted attempts to purchase bonds by the ECB, coupled with the lack of effective policy responses to the euro sovereign crisis at a euro-zone level, have created the conditions for BTP yields to rise."
He said a yield of 7.5% was "unstable" and that either policy responses would restore investor confidence and yields decline, or yields would increase into "even more distressed territory as BTPs start to trade on a cash price basis".
Hong Kong-based GaveKal Dragonomics said either the ECB should step in and buy risk assets very aggressively - "in a manner reminiscent to what the HKMA did in 1998" - or a number of Southern European countries would be "forced to impose capital controls, shut their markets, declare a week-long bank holiday and re-issue national currencies that stand to pass the test of time".
It also argued that the fact German and French policymakers had now started to discuss openly the possibility of Greece leaving the euro-zone had "changed investor psychology".
"Should Greece leave," it added, "what Southern European nation would want to remain stuck in an uncompetitive euro, begging Germany for help to pay punitively high interest rates?"
Aladdin Credit and Economic Research described the unfolding situation in Europe as a SNAFU.
"The view that the euro-zone could never break apart has been shattered," it said. "We wonder if perhaps it is time to consider a managed default similar to the Brady Bond programme that helped the US emerge from the Latin American debt crisis in the 1980s."
But some in the industry sounded notes of cautious optimism. Tom Higgins, global macroeconomic strategist at Standish, conceded a "muddling through" was likely to be the answer in the short term.
But he added: "Despite the ongoing state of crisis in the euro-zone, when all is resolved, it will be a stronger union as a result. There are also going to be plenty of disagreements, but the key factor is that it is in no one's interest for the euro-zone to fall apart.
"There has been much speculation over a possible Greek exit from the euro, but it is unlikely in the near term."
Chris Iggo, fixed income CIO at AXA IM, said the decisions taken by European leaders last week and the "more supportive" stance of new ECB president Mario Draghi should be supportive for Spain and even Ireland, which "has already gone a long way down the fiscal adjustment road".
He added: "Governments in Spain and Italy need to convince the IMF and EU they can take the necessary steps to reduce borrowing, and, in both cases, there is some political uncertainty."
Professor Philip Booth from Cass Business School said Italian government debt would "just about be manageable" if the government rapidly deregulated its economy so that economic growth increased.
"This solution is well within the reach of the government in theory, but the practice of Italian politics makes it more difficult to achieve," he said.
"The alternative has to be an orderly write-down of debt in both the public and private sectors. The attempt to repackage debt and have already indebted states provide guarantees will fail."