Italian debt is ‘dangerous but attractive’, says Soros

Buying Italian debt is ‘dangerous’ but ‘attractive’, says former hedge fund manager George Soros, a veteran of many globally critical investment decisions.

“At 6% or 7%, Italian bonds are a speculation. At 5% or 4% I think they would be a very, very good long-term investment,” he said in an interview with Reuters.

The catch is the uncertainty about whether the Eurozone debt crisis will finally be resolved or whether it will blow up. At 6%, he said, “that’s a fantastic yield, which is not going to stay up there the moment things settle down.”

For many investors, Italian debt at 6% is too much of a gamble, with German bonds looking a safer and more attractive bet at 4%. A narrowing of the differential, however, would make Italian debt more attractive.

Italian prime minister Mario Monti’s reforms have earned widespread praise, but it is still too early to be sure which direction the Eurozone crisis will take. Monti told German Chancellor Angela Merkel that Italy needed support in his efforts to implement structural reforms to the Italian economy.

As World Bank President Robert Zoellick, speaking on Bloomberg Television, said: “it’s going to be a question of the competitiveness reforms. I and others have suggested things like a partial use of Eurobonds for some of the stock of debt if countries make reforms. Others have talked about way to provide investment and financial resources. But if we’re sitting here six months from now and the Italian public says enough is enough, what happens to Europe? It’s very bad.” 

Foreign investors have shown increased interest at auctions of Italian short-dated sovereign debt this year, but it is Italian buyers who have dominated the scene. Italian five and 10-year BTP bonds are due for sale on January 30, with almost €26bn of bonds and about €10bn euros in coupons maturing.

Brave investors in UniCredit shares have been vindicated. The value of shares in the bank has rebounded, giving investors who bought shares and rights during the bank’s €7.5bn euro offering the biggest equity return among the 50 largest companies in the eurozone. UniCredit is the best performer in the Euro Stoxx 50 Index since January 10, gaining 67%.

Bloomberg says investors who bought the rights (to buy new shares) at the end of the first day, January 9, may record a 75% gain if they convert them to shares at the January 26 closing price.

UniCredit shares had hit a 23-year low, and the bank’s chief executive Federico Ghizzoni had bet that investors would take up the offer. A notable buyer was Capital Research & Management Co., a Los Angeles-based investment fund, which doubled its stake.

Matthias Fankhauser, a fund manager at Clariden Leu in Zurich, told Bloomberg: “It’s been a great opportunity and some investors saw it. UniCredit was lucky with its timing. It’s been a roller coaster ride for them but looks like it will end well.”

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