Analyst teams are examining Italy's new post-election scenario in record time. Among the first to cross the finish line was the Barclays team, made up of Fabio Fois, Giuseppe Maraffino and Antonio Garcia Pascual. Here is, in summary, their forecast on the next developments in the Italian case.
ASK FOR THE INTERVENTION OF DRAGES? FOR NOW IT'S SOON
After the shock of the vote, is the first consideration, uncertainty reigns supreme. Hence the decision to focus on issues with a maturity of less than three years, "protected" by the ECB umbrella. Obviously, the evolution of the market will be conditioned by the ability of the political forces to ensure a government for the country and, more importantly, to reassure the markets regarding the willingness to continue with the policy of fiscal consolidation and structural reforms .
In the short term, the analysis continues, "it is premature to imagine a deterioration of the situation which would lead to the request for OMT interventions by the European Union". To trigger the OMT, a surge in BTP yields above the threshold of 6-6,50%, as in November 2011 and July 2012, would be necessary. But "this scenario is unlikely if one takes into account the massive sales of Italian securities that were recorded on those occasions". What's more, operators with debt exposure are now in stronger shape and therefore able to withstand the shock wave. Furthermore, the strength of domestic demand in support of government securities should not be overlooked.
THE TREASURY WILL RELY ON THE BTP-ITALIA
Furthermore, on the supply side, the Treasury is in favorable conditions. So far, in 2013, Italy has invested securities for 36 billion euro equal to 19% of its annual requirement and has managed, thanks to the 15-year BTP, to lengthen the "duration" of the debt. A long-lasting political crisis will, of course, cause issues for bond placements (137 billion) in the remainder of the year. But the Treasury has several tools in hand to deal with any emergency (albeit at increasing costs): focusing on short-term BOTs instead of BTPs and relaunching the issues of BTP Italia aimed at the retail market which in 2012 made it possible to raise 27 billion.
SERIE B RISK. BUT CANADA SAVES US
The high instability of the political framework will lead to harsher judgments by the rating agencies. S&P (BBB+ rating, negative outlook) recently underlined that Italy's problems are more serious in terms of lack of growth rather than public debt and insisted on the risk "of losing the opportunity after the elections to enact structural reforms and relaunch growth”. Given the developments in the political situation, the authors say, it is probable that the rating of 13 January, in which the negative outlook was motivated by the uncertainty after the vote, will result in a new assessment within days. Even Moody's, firm at the rating of July 13, 2012 (Baa 2, negative rating) and Fitch (A- last December) have underlined the post-election risk.
FOR THE BANKS THE WEIGHT OF THE 225 BILLION TO BE RETURNED TO FRANKFURT
However, it is unlikely that any rating cut will extend to the conditions applied by the European Central Bank and, consequently, to the cost of funding for Italian banks. But it should not be forgotten that, according to the Frankfurt rules, assets with a rating in the AAA/A area enjoy better conditions than those between BBB+/BBB-. In this regard, however, it should not be forgotten that the Canadian agency Dbrs continues to attribute scorecard A to Italy: as a result, the ECB could keep the risk of our banks in Serie A even if Fitch decides to proceed with a relegation compared to the current A-.
An immediate consequence could be the postponement to a later date of the repayment of the Ltro funds lent by the ECB to Italian banks (225 billion). This factor could support rates in the short term but to the detriment of the system's medium-term prospects (3 years).
