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Comment

Not the full Monti: Spain still key to Italian funding

Italian yields shot up after prime minister Mario Monti announced this weekend that he would be stepping down earlier than expected — and the spectre of ex-leader Silvio Berlusconi’s return spooked investors. But the Republic of Italy’s 2013 funding prospects won’t be decided at the country's ballot box. It’s the Kingdom of Spain’s actions that matter.

Yields on Italian 10 year bonds leapt up 29bp on Monday following the news that Italy’s prime minister Mario Monti would resign once the 2013 budget was passed.

The sudden risk aversion may have had as much to do with the possibility of a return to public life for ex-premier Silvio Berlusconi as it did with the prospect of losing Monti. But markets certainly took fright, even though there is talk of Monti returning to seek an electoral stamp of approval for his reforms.

In the event, though, the Italian political future, and whether Monti will be a part of it, may well not be the biggest concern for investors looking at the Italian sovereign credit next year. Italy is optimistic about its funding prospects in 2013 — and is planning a new 15 year euro benchmark. But its ability to fund, like the rest of the eurozone periphery, has much to do with Spain’s dithering over EU aid.

Bankers and analysts grumble that Spain is living on borrowed time and has been for a while. So far, the mere promise of ECB help ("whatever it takes," in the words of ECB president Mario Draghi) has been enough to bring its yields down, but few outside Madrid now suggest that the sovereign can avoid a bail-out — and the additional austerity burden that will entail — forever.

Monti’s announcement produced a momentary shock, but already the situation is calming down. Yields on the 10 year benchmark reversed some of their jump on Tuesday, having dropped 7bp from opening to 1pm London time.

Analysts suggest that the yield spike on Monday was partly due to a readjustment in Italian pricing, which has fallen markedly over the past months. Even at their highest on Monday, 10 year yields were still lower than three weeks ago — and 111bp lower than at the end of August.

There were fears that the austerity measures the technocrat Monti has introduced over the past year could be in jeopardy, with the populist and increasingly anti-European — or more specifically, anti-German — Berlusconi eyeing a return to the top job.

Indeed, it was Berlusconi who triggered the PM’s decision to stand down, when his People of Freedom party removed its support for the Monti government.


Polling matters

But the polls show Berlusconi’s chances of returning are slim. With the election only weeks away, his party has just 15% support, far behind the front-running Democratic Party on 29%.

An Italian election was due in March or April anyway. Monti’s decision has just brought that forward to February. Winning a democratic mandate for the austerity measures, then letting the Italian Treasury get on with its funding activities, can hardly be a bad thing.

Italy’s political system is as opaque as the dress code for a Berlusconi party is transparent. But with opinion polls so clear-cut just a few weeks before the election, Monti’s reforms look set to remain, and receive a democratic mandate, whether or not their architect is at the helm.

But as long as Spain refuses a bail-out, volatility and fear can raise their heads. Monti’s move has not shifted the spotlight on to Italy. As it was before the weekend, and has been for months now, the investor glare is still firmly on Spain.

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