Italy

The resilience of Italy’s benchmark FTSE MIB index to the growing political risk in the country suggests investor sentiment towards Italy is still favourable. But Italian equity capital markets bankers are understandably nervous that the expected coalition government of the Five Star Movement and Northern League could change investors’ minds.

The Italian Obbligazioni Bancarie Garantite market has barely reacted to the growing probability that an anti-European coalition between the Five Star Movement and League parties could soon be announced. Even though OBGs are expensive relative to senior unsecured and sovereign bond markets, spreads could well hold steady unless there is a considerable improvement in supply.

Investors may be underestimating the chance of a Eurosceptic, populist government taking power in Italy, one expert on the country warned this week, as the Five Star Movement and Northern League on Thursday made strong progress on forming a coalition — without any mainstream parties. When the general election in early March failed to deliver a government, such a coalition was widely deemed the worst possible outcome for the market — particularly as one of the few policies the duo share is a looser fiscal policy.

Italy’s bonds took a hit on Wednesday afternoon after the country’s president Sergio Mattarella allowed the Five Star Movement and the Northern League — the best performing parties in the country’s general election in March — 24 hours to form a government before he appoints a non-partisan prime minister.

Investors are confident Italian spreads will stabilise after the sovereign widened versus Germany over fears of a potential second general election of the year. There was some evidence of that on Wednesday morning as the country’s yields reversed some of their losses.

Banco BPM and Banca IFIS found success in the senior unsecured market this week, despite an uncertain political backdrop in Italy after parties prolonged talks to form a new government.

Banco BPM sold €500m of senior bonds with a 'modest' new issue premium on Monday, against an uncertain political backdrop in Italy after parties prolonged talks to form a new government.

UniCredit sold its remaining stake in Italian wind operator ERG for €118m to an eager investor base after markets closed on Tuesday evening.

Despite the political risk surrounding the formation of the Italian government, one asset manager believes its debt is better value than that of some of its peers in the peripheral Europe.

Italian scooter maker Piaggio announced a high yield bond roadshow on Tuesday, the seventh issuer to do so in five days as volumes continue to rebound after a difficult February.

As negotiations over the future of Italy’s government begin in earnest, investors appear to be betting that political risk for the country has been overestimated.

As negotiations over the future of Italy’s government begin in earnest, investors appear to be betting that political risk for the country has been overestimated.