Italy shaky despite ECB money
02 March 2012 |

Bankers are warning that more than €1trn of cheap loans from the European Central Bank may not be enough to prevent an Italian liquidity crisis later this year, with foreign investors – once a major provider of credit to Rome – still reluctant to buy the country’s debt.


Fuelled by three-year loans from the ECB, which injected another €530bn into the banking system this week on top of the €489bn provided in December, domestic banks have resumed their purchases of Italian government debt, helping push down yields and restore market confidence.

But foreign banks have consistently dumped Italian debt in recent months, creating the potential for some serious headaches for Prime Minister Mario Monti and his government as they seek to refinance about €250bn of debt coming due this year without the support of traditionally important lenders.

“We expect the second half of 2012 to be challenging as the LTRO’s liquidity will be fully utilised by then, and concerns will arise that domestic banks can’t support their sovereign indefinitely,” said Pavan Wadhwa, global head of rates strategy at JP Morgan, who predicts Italian 10-year yields will spike to 7% by the end of the year.

According to Wadhwa, non-domestic investors held more than half of outstanding Italian debt as recently as June. Since then, he said, they have sold €176bn of Italian bonds, pushing foreign holdings to an estimated 40% today. BNP Paribas alone cut its exposure by €8bn during the second half.

Senior bankers expect this trend to continue, as concerns linger about the sustainability of Italy’s debt levels – at €1.6trn, among the highest in the world. Many foreign firms are under sustained pressure from shareholders to reduce their exposure to countries such as Italy, Spain, Greece and Portugal.

“Non-doms are the first to flee a market and it takes them a very long time to come back, not least because Italian and Spanish paper is now considered a credit, rather than a rates product”

“I wouldn’t know what to tell the shareholders if we increased our holdings,” said the treasurer of one of Europe’s largest banks and a formerly a major creditor to Rome, when asked about Italian bonds. “It’s different if you’re a small bank in Italy. Nobody cares.”

“Non-doms are the first to flee a market and it takes them a very long time to come back, not least because Italian and Spanish paper is now considered a credit, rather than a rates product,” added Wadhwa. “The LTRO cannot solve the problem.”

Refinancing calendar

Rome has only completed about 10% of its scheduled issuance for 2012 – about the same as this time last year. Morgan Stanley estimates that domestic banks bought just €4bn of paper after the first LTRO. While that could increase after the second round of ECB cash, incremental domestic purchases are unlikely to make up for foreigners’ sales.
Italy’s slow start to its refinancing calendar contrasts with that of Spain, which accelerated issuance in the wake of the first LTRO. Madrid has completed 35% of its refinancing needs for 2012 compared with 10% at this time last year. A similar take-up of government bonds after the latest LTRO could see Spanish banks – which bought €27bn of Spanish government bonds following the first LTRO – easily fulfil the sovereign’s €86bn refinancing needs for 2012, Morgan Stanley analysts argue.

“Ultimately the LTRO won’t be enough without real structural and institutional change in Italy,” said the European head of debt capital markets at one US bank, who has in the past run debt deals for Italy. “This is a real problem. The pool of money inside of Italy is not enough.”

Real money

One solution for Rome might be to woo other foreign investors such as hedge funds, insurance companies and pension funds. That has begun, but bankers say Standard and Poor’s decision to downgrade Italy to BBB+ in January has caused Italian bonds to drop out of benchmark investment indices and spooked real-money investors.

“Ultimately the LTRO won’t be enough without real structural and institutional change in Italy”

“We haven’t seen the reversal in attitude from real-money investors that I think we’ll need [for Italy to be able to refinance this year’s maturing debt],” said one senior rates trader. “We’ve had to hold a lot of investors’ hands and walk them through the implications of the past year. It’s a rates product, but it has to be risk-managed with a credit hat on.”

Some point to a lack of demand at the longer end of the Italian curve as proof that major problems persist. Short-term debt has rebounded most, with two-year yields falling from a high of 7.7% in November to 1.9%. The rebound in 10-year notes has been less pronounced.

Uncertainty has driven many players away altogether. “People who were lending to the sovereigns are moving towards the corporate bond markets,” said a board member at one bank which has traditionally been one of Italy’s biggest foreign creditors. “It will continue to be testing times.”

Not all participants subscribe to this bearish scenario, and there have been notable exceptions that have committed to investing in the periphery. Barclays increased its Italian exposure 57% in the fourth quarter by buying up BTPs for its liquidity buffer. A major Spanish bank is rumoured to be another big buyer.

But banks making such bets are few and far between, and some say that banks taking punts aren’t a sustainable – or reliable – way to ensure that Italy is funded through to the end of the year. “Europe has an over-leverage problem, which cannot be cured by more leverage,” said Wadhwa.

damn

I think these assholes really believe that they can somehow print enough cash to overcome the inevitable.

The person responsible for this idiocy is

Bloomberg reports on Jim Rogers take on Geithner:
“He caused the problem all last year,” Rogers said on Bloomberg Television. “He came up with TARP, and he came up with all these absurd bailouts. Mr. Geithner has never known what he is doing. He doesn’t know what he is doing now and pretty soon everybody is going to find out, including Mr. Obama.”

Why the Spanish ham for an Italian thread?

WilyB wrote:

Why the Spanish ham for an Italian thread?

It's not a Spanish ham, it's one of FrogFyer's models.

WilyB wrote:

Why the Spanish ham for an Italian thread?

snob on/
like it fuckin matters on a site full of classless white and Albanian trash

btw that legs from Portugal


snob off/

FrogFryer wrote:

WilyB wrote:

Why the Spanish ham for an Italian thread?

snob on/
like it fuckin matters on a site full of classless white and Albanian trash

btw that legs from Portugal


snob off/

Nice electric probes, too.


You doing experiments, Fryer?

OldLyme wrote:

FrogFryer wrote:

WilyB wrote:

Why the Spanish ham for an Italian thread?

snob on/
like it fuckin matters on a site full of classless white and Albanian trash

btw that legs from Portugal


snob off/

Nice electric probes, too.


You doing experiments, Fryer?

hardcore

but it depends on what substrate youre talking about
wools ,silks ,polys ,cellulosics,print jobs

blah blah blah

HEY NOW

Ha. They can barely handle Greece. Now in comes Italy. Next Spain later Portugal and last Ireland. Europe is le fucked.