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Anthony Gillham, portfolio manager, Skandia Investment Group

Italy – Wake up and smell the coffee

It looks like the market has reacted with some cheer to the news that Silvio Berlusconi has stepped down as Italian Prime Minister with his successor Mario Monti asked to form a new government following approval of a reform package by the Italian parliament on Saturday, says Anthony Gillham (pictured), portfolio manager at Skandia Investment Group (SIG)…

Italian 10 year government bond yields had hit around 7.5% last week, levels that were said to have triggered bail outs in other peripheral European markets, but on Friday dropped to around 6.5%. Risk assets are firmer as a result.

While the cheer is understandable given Monti's track record as a European Union commissioner and the expectation that his technocratic government will be able to unite the various Italian political factions behind a common cause, the fact remains that Monti is unelected to this position and lacks a popular mandate. This is not sustainable in the long run.

We should also remember that at a spread of nearly 4.7% to German Bunds, a 6.5% yield for Italian 10 year government bonds is not a reason to celebrate, a fact underlined by LCH Clearnet's decision to increase margin requirements for Italian government bonds.

With the president of Germany's Bundesbank re-affirming opposition to ECB intervention in bond markets it is clear that a solution to the Eurozone crisis remains some way off and steps to it mired in execution risk; financial market volatility could be here to stay for some time longer. So wake up and smell the coffee!


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