Fixed IncomeMay 13 2013

Italy withstands political unease

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Italy is the world’s third-largest government bond market and Europe’s largest. It’s also a nation that has had more governments than any other major European power since the Second World War.

The latest episode in the long-running saga that is Italian politics appears to be drawing to a close. After two months without a government, Enrico Letta has become the latest in a long line of Italian prime ministers.

Intriguingly, the Italian bond market has tolerated this period of uncertainty surprisingly well. In fact, that is an understatement. The market that is ‘too big to fail’ has reacted positively to Mr Letta’s appointment with 10-year borrowing costs falling below 4 per cent.

This is not only lower than at the time of the election, but a level not seen for more than two and a half years.

At 46 years old, Mr Letta is one of the youngest Italian prime ministers since the Second World War. It is greatly hoped that a more youthful leader will bring change to a political system in desperate need of an overhaul.

It is also worth noting that the Italian elections appear to have coincided with a material uptick in the fortunes for many of Europe’s major sovereign borrowers.

Since February, the UK, France, Spain and Portugal have all seen the cost of borrowing fall. Are we finally approaching the end of the road for the eurozone crisis? Or perhaps, more likely, is this a reflection of global influences greatly assisted by the European Central Bank?

Fortunately, Mr Letta’s appointment appears to have coincided with a softening stance on austerity policies. There seems to be a realisation that such policies are counterproductive and are merely worsening peripheral Europe’s malaise.

This softening should not result in a slippage in reform. Mr Letta must continue to pursue policies that make his country more competitive in the eurozone. Indeed, given the poor health of Italy’s banking systems, we are as a result seeing very little lending and, as such, Italian companies are starved of credit.

Italy’s short-term prospects look favourable, given what would appear to be reasonable foundations. But, by some counts, Mr Letta’s government will be the 62nd since 1946, so bets on the country’s longer term outlook is less clear.

Andrew Morris is managing director at Rowan Dartington Signature