Italy’s general elections are already anticipated, Pioneer’s Marasciulo reminds

Cosimo Marasciulo, head of European government bonds and FX at Pioneer Investments, shares his views about Italy’s political situation after the formal resignation of Mario Monti, and what this means for fixed-income portfolios.

You recently took some profits on your holdings in Italy. Did you anticipate this move?
Our decision to take profit on our long position on Italy in October was a tactical move and was not driven by the political situation in Italy. Following the ECB’s commitment to do “whatever it takes to save the euro”, yields on Italian (and Spanish) bonds tightened significantly as investors started increasing exposure to peripheral nations. Spreads tightened to such an extent that we decided to take profit on our positions on Italy and Spain and move to a benchmark-neutral stance. A general election in Italy in early 2013 has always been anticipated and our move was therefore not driven by political considerations.

Would the return of a “political” government undermine Italy’s recent fiscal efforts?
We have continuously argued that a deal with the EU to conserve all of these fiscal efforts would have been welcomed by investors, but this would have amounted to a request for aid which Italy did not need (more than other EMU members). Investors may now show some caution in relation to Italy and consequently, spreads may be pushed up, but we don’t foresee any further speculation. First of all, although some things were left unfinished, budget consolidation and reforms have been enacted. Moreover, the ECB may have received less attention of late, but it is still there to monitor and limit any dramatic increase in volatility. We’re also closely watching events and looking for an attractive entry point if yields and spreads rise.

Sovereign spreads have increased sharply. Could Italy’s crisis bring back global risk aversion?
As I pointed out before, spreads fell so sharply that they suggested reduced concerns, not only over Italy, but over the overall debt crisis. We often look at 10-year spreads but if we looked at how much yields have fallen at the shorter end of the curve (500 bps for 2-year BTP), one would be almost convinced that the EU managed to resolve the whole issue (which is not the case, as long as EU summits end up with the usual muddling through). The efforts of individual countries, notably Italy, helped keep spreads low and investors should not be overly concerned about a reversal in spreads.

Do you have any forecast on the post-election political scenario?
Italian politics are not easy to understand and all the more so in the current situation. Most polls say the Center-Left is the front runner after picking its own candidate. We think that holding the elections in February would reduce the uncertainty.The financial markets would favour a scenario which keeps the much-respected outgoing Prime Minister well within the ranks of economic policy makers.

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