Italy

It’s hard not to feel sympathy for Italian president Sergio Mattarella, who felt obliged to reject the Five Star Movement and Northern League nominee for financial minister to assuage investor concerns, but the decision will likely strengthen Italy’s radical political forces.

The violent moves in Italy’s curve since its president blocked the formation of a populist government may well be a sign of things to come, as government bond markets adjust to the post-crisis world of dwindling bank balance sheet support — and no central bank help.

Bond market havoc following the Italian president’s decision to appoint a technocratic government has shut the euro market for most public sector borrowers. Volatile swap spreads are making issuance near impossible, while an “enormous” flattening in Italy’s curve is of particular concern for that sovereign, said one head of SSA syndicate.

An escalation of political risk in Italy has rattled investors, substantially increasing hedging activity this week as concerns ramped up about the future of the eurozone.

Investors have been reducing their exposures to risk in financial markets this week, after Italian president Sergio Mattarella helped to set the country on a course towards fresh elections.

The political manoeuvrings in Italy’s path to being governed — as well as poor eurozone economic data — played havoc with rates this week, leading to SSA deals either paying higher new issue concessions, or falling short of subscription. More volatility could come, after the country’s president approved the likely coalition partners’ choice of prime minister but held back from appointing a eurosceptic economist to take charge of the country’s economy. Craig McGlashan reports.

As investors take shelter from the incoming Italian administration by selling the capital instruments of the country’s banks, one security outperformed this week. UniCredit’s convertible and subordinated hybrid equity-linked securities (Cashes) traded up at the beginning of the week as investors assess how likely it is that the bank will have to remove the instrument from its capital stack.

Some investors are optimistic that Italy’s borrowing costs can recover following a rapid rise over the last few days as the spending plans of its likely new government came to light. But they also warned that the picture is rapidly changing — as evidenced by the apparent push-back this week by the Italian president against the proposed candidate for prime minister.

An unorthodox government is now in charge in Italy, but this should not prevent investors from backing Italian corporates as they prep initial public offerings.

Rainbow Group, the Italian media firm best known as a producer of children’s television, has decided to pull its listing on Borsa Italiana.

The pipeline for this week is swelling, according to an SSA syndicate official, but the focus may shift from last week's emphasis on euros to dollars.

On Monday investors were turning away from Italian bank debt after the Five Star Movement and the League reached a coalition agreement. But some believe the market will shortly rally.