ITALIAN WOES: Italy's troubles were centre stage this week, with markets tumbling in the wake of Italian bond yields (briefly) surpassing 6 per cent for the first time. Five weeks ago, yields were just 4.6 per cent, and it is eerily reminiscent of Greek, Irish and Portugese yields prior to bailouts.
Gary Jenkins of Evolution Securities notes that the three sovereigns spent an average of 43 consecutive days trading over 5.5 per cent before they consistently exceeded 6 per cent; an average of 24 consecutive days trading above 6 per cent before breaching 6.5 per cent; and only 15 days trading over 6.5 per cent before breaching the all-important 7 per cent figure.
Merrill Lynch analysts suggest time is even more pressing on this occasion. “At this pace, Italy’s borrowing costs could reach levels that would make its debt dynamics unsustainable in a week,” they warn.
SOLD SHORT:Italian politicians have been busy blaming recent developments on "speculators" (or "locusts", to quote Silvio Berlusconi). Consob, Italy's regulator, has placed restrictions on short sellers seeking to bet against Italian banks.
Short sellers, of course, were responsible for wrecking Anglo, Bear Stearns, Lehman Brothers, AIG, HBOS, Icelandic banks and other institutions that just happened to be dysfunctional, over-leveraged entities. They were also responsible for the problems in Iceland and Greece (yes, we’re being ironic).
Evolution’s Gary Jenkins describes the restrictions as “desperate”.
EU internal markets commissioner Michel Barnier, meanwhile, is suggesting that credit-rating agencies be banned from placing ratings on countries in bailout programmes. Their crime, according to Standard and Poor’s president Deven Sharma, is “calling it as it is”. Short sellers could say the same.
OVEREXPOSED: How exposed are global banks to Italy? Very, according to analysts at Collins Stewart. Aggregate claims total $262 billion (€185 billion), which is more than combined exposures to Greece, Ireland, Portugal and Spain ($226 billion).
French banks are particularly exposed, holding almost $98 billion of Italian debt, with German banks holding $51 billion.
Collins Stewart stresses that “almost all of the Italian exposures are credit-worthy and performing”. Nevertheless, shares in the Stoxx banking index are trading at an average of just 7.5 times forward earnings – the lowest since markets bottomed in March 2009 and way below their 10-year average of 12.85.
RBS analysts agree that European banks are cheap, even assuming sovereign defaults in Ireland, Greece and Portugal.
Are they still cheap if Italy or Spain end up defaulting? “Not true,” RBS cautions.
