Italy should preserve its ‘credibility capital’, Barclays warns

Italy’s main problem is not fiscal, rather it is one of anemic growth and a secular loss of competitiveness. In the eyes of financial markets, and the country needs to complete the reform agenda in order to raise long-term growth prospects, Fabio Fois, European economist at Barclays warned.

“In our opinion, Italy should be careful to not erode the ‘credibility capital’
accumulated by Prime Minister Mario Monti so far. We believe his commitment
to assuming a central role in Italian politics (a scenario that we would not rule out
completely at this stage) would be the best way to preserve that in the eyes of

Italy’s European partners and financial markets,” the economist wrote in a paper discussing the country’s political scenario.

While a potential centre-left coalition formed by PD (Democratic Party) and SEL
(Left Ecology Freedom) leads polls, the risk of a political impasse is not zero at
this stage, Barclays added.

“The differing electoral systems of the two chambers make it possible for no clear majority to be reached in the Senate, while in the Lower Chamber the PD and SEL are likely to secure an outright majority, according to recent polls,” Fois warned.

Latest political developments have affected the market, although the weakness of Italian bonds was only temporary and limited to about 40bp, with no particular effects on this week’s auctions.

But the bank expects markets to be very sensitive to political noise during the electoral
campaign, with Italian paper likely to be more volatile than the relatively stable
September-November period.

“However, we do not expect a situation of stress on the Italian government debt
securities as in Q4 11. A combination of more Italian debt being held by domestic
accounts, significant forced liquidation in peripheral assets that has already
occurred and, more importantly, the backstop provided by the ECB, should limit
the intensity of a possible stress situation compared to what was seen in 2011,” Fois said.

Finally, should the political debate signal stability and a continued reform agenda, Fois
believes any sell-off should be seen as an opportunity to pick up extra yield in a
context of very low safe-haven yields.

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