Italian downgrade will not surprise Allianz Global Investors

Allianz Global Investors’ European chief investment officer has said it will be little surprise if Italy is downgraded soon, adding to the pressure already being felt in Rome by the eurozone crisis.

It comes a day after some division emerged between fund managers and ratings agencies over the fate of Italy under new prime minister Mario Monti.

AGI’s Neil Dwane (pictured) said a downgrade for Italy “would simply reflect that it has Europe’s second highest sovereign debt to GDP ratio, after Greece, and that during the fourth quarter of 2011 its longer term funding rates rose to above 7%.”

He said this would “eat into more and more of Government revenues, leaving less for the government to spend on its other activities, and more need for austerity measures.”

He noted Rome would need to refinance about €350bn of government debt by June.

“Italian workers are 35% less productive than their German counterparts, a gap which has widened over the last decade. Thus with an unelected government in power, which relies on elected politicians for its authority, Italy looks unstable.”

But Dwane noted on the positive side Italy has greater per capita wealth than Germany, lower levels of consumer and corporate debt than all OECD countries, 1250 tonnes of gold – worth 10% of government debt at current prices – and, along with Germany, Italy is the only OECD country to run a primary surplus.

“The challenge for Italy is to move over the next decade to a more productive and efficient economy where taxes are paid and financial honesty rewarded. With debt servicing costs rising, Italy has a clear economic and financial incentive to restructure its economy.”

Fund managers speaking at a conference yesterday for ratings agency Fitch said they doubted Italy would be downgraded, even though Fitch’s A plus rating comes with a negative watch.

Erik Nielsen, UniCredit’s head of economics and fixed income, said: “If Italy has to restructure you will have US dollar / euro parity. There is not a chance in hell they will have to restructure.”

He added Italy’s 2011 export growth to November was about double Great Britain’s, “yet it is stunning people have a whole set of pre-set conditions in their minds that then sidetracks their analysis. If people say there is a significant risk of a downgrade it becomes a self-fulfilling prophecy. There is clearly a buyers’ strike out there, and no-one wants to be the first.”

David Riley, Fitch’s head of global sovereign ratings, said: “We have a situation now where as Italian bonds get cheaper you have very few buyers. That is because as spreads widen it validates the concerns of those who believe Italy is insolvent.

“Spreads over 400bps cannot be afforded by Italy, they can be sustained for only a period of time. The concern we have is not only Italy is too big to fail, but is it too big to save? It is difficult to foresee a rescue package big enough to save it.”

Chris Iggo, fixed income chief investment officer at Axa Investment Managers, called for more intervention in debt markets by the European Central Bank, “which can break the psychology” of buyers on strike.

AGI’s Dwane said: “The question for all OECD countries though, whether it is Italy, the USA or the UK, is whether its politicians can or will carry their people on this journey for long enough before either money-printing inflation – likely in the UK and US – or default and depression (Greece) are used as solutions. Either way, the welfare and over-indebted country model of the OECD economies is on its last legs.”


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