Italy is teetering on the edge of a recession for the third time in a decade. And yet, upon the government’s announcement of the sale of new 30-year syndicated bonds, the yield soared a total of 9 basis points to 3.66 per cent – its highest since January, 2017. Simultaneously, other high-grade eurozone government bond yields dipped, falling from earlier highs, that resulted from a surge in European equities. Germany’s 10-year government bond yield, for example, was down 1.4 basis points.
Italy has mandated Banca IMI, BNP Paribas, Credit Agricole, Deutsche Bank and Goldman Sachs to arrange the sale. The expectation is that Italy will offer decent concessions on these bonds, which in turn prompted investors to sell existing Italian bonds to make room for the new issue.
The bond sale gives Italy’s finances a much needed spike. Italy’s government’s borrowing costs recently rose to their highest level in the past three weeks, pushed in part by growing concern over Italy’s deteriorating economic outlook. After narrowly avoiding a showdown with the EU over Italy’s budget, recent surveys also show that the Italian services sector contracted in January, and the country remains on the brink of a recession – a situation that is likely to continue into the first quarter of 2019, with expected growth of only 0.1%.
“The skepticism that we saw last year, about the wisdom of the new government’s fiscal plans, is being revived by the economic data,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.
Italy’s bond sale is allowing it to raise 8 billion euro. This sale also helps Italy get a head start on its 250 billion euro fundraising effort, helping mitigate periods of economic unrest that may arise later in the year. The sale of 2049 securities attracted more than 41 billion euro in offer. The 10 billion euro offering of 2035 securities earlier in January, attracted 35.5 billion euro in offers. Soon after, bank stocks also rallied.
Barely a week after this announcement, Italy’s populist leaders promised to replace top officials at the country’s central bank, Bank of Italy, who they said must pay for failing to prevent a spate of banking scandals, in which thousands lost their savings. Small shareholders in Popolare di Vicenza and Veneto Banca, lost all their investments when the lenders failed to raise fresh capital on the market. Their investments were wiped out and wound down, with their good assets sold to larger peer, Intesa Sanpaolo, (of which Banca IMI is a subsidiary) for one euro. Now, former bank officials are facing a trial over allegations that they sold grossly overvalued shares to small investors, and lent money to clients on the condition that some of the funds would be used to buy additional shares.
“The management of the Bank of Italy, and (market watchdog) Consob, have to be completely cleared out,” League party leader and Deputy Prime Minister, Matteo Salvini, told a gathering of former clients. “We are here because those who should have supervised didn’t supervise.”
Italy’s new government has set aside 1.5 billion euro to compensate the small shareholders who lot all their money, as well as setting up a parliamentary committee to establish who was responsible. United on this, Salvini and Di Maio said they would not heed warnings from the European Commission that their compensation fund may break EU rules.
“We are absolutely not bothered,” Di Maio said.
Salvini added, “if Europe agrees (to the compensation fund) then that’s okay, if Europe doesn’t agree, then for us it’s still okay”.
Matt Cairns, rates strategist at Rabobank, added that unrest between the two ruling parties has raised discussions of early elections, particularly because of Salvini’s reputed push to take leadership. This in turn has led to speculations and concern over Italian stability – and the need for Italy to offer attractive concessions to sell the bonds. While the market would enjoy a Salvini-led government for the tax cuts, he noted, however, that “whether that feeds into the structural changes the country requires would be debatable.”
The release of the eurozone’s purchasing managers’ index survey, often used as an indicator of economic health for manufacturing and service sectors, showed that eurozone businesses are expanding at their weakest rates since the middle of 2013.
To complicate matters further, the European Commission revised their 2019 GDP growth forecasts downward by one-third (1.5 per cent from 1.9 per cent) for the entire region, citing global uncertainties and trade tensions. For the eurozone, the growth forecast was slashed from 1.9 per cent to 1.3 per cent. This is in partly due to ongoing uncertainties around Brexit, along with a sharp slowdown in China’s economy – the EU’s second-biggest trading partner after the US. The good news is that inflation will remain under the Commission’s goal of 2%, and the economic slump is considered likely to let up in the second half of 2019.