Position: Short Italy (EWI)
Both Italy and Austria today announced they were putting off plans to borrow cash in the coming month. Neither of them cited market conditions.
As picked up by the Dow Jones Newswires:
Italy will cancel its mid-month (August 12th) auction for medium and long-term bonds, known as BTPs, “considering the large cash availability and the limited borrowing requirement,” the Treasury said in a statement Monday.
This news is deeply concerning given the critical nature of the country’s funding needs. In the next months alone (see chart below) Italy will be burning through 134 Billion EUR in principal and interest payments coming due. This means that the country will have to rely even more on successful future bond auctions (ie sufficient demand at yields not significantly over previous auctions) to fund its costs. This is a risk set-up we don’t like considering that bond auctions across the periphery have trended higher throughout most of the year, and that both the ECB and China have been forced or cajoled into being “hidden” actors to ensure demand.
The country’s funding issues come on the backdrop of PM Berlusconi’s government that is mired in scandal, including his finance minister Tremonti; an economy 3X the size of the combined economies of Greece, Portugal, and Ireland with some €1.9 Trillion of debt, or 120% of GDP (ranking Italy second behind Greece (144%) for the largest debt as a % of GDP in the Eurozone) that current bailout facilities are not prepared to handle; and a banking industry that was largely unscathed by the bank stress tests, but is highly levered to the rest of the periphery.
While yields on the 10YR Italian government bond have come down from the 6% level in recent days (historically an important breakout line for Greece, Ireland, and Portugal that necessitated bailouts) and Italian CDS took a massive dive (-55bps) on Friday following late Thursday’s announcement of a second Greece bailout, we by no means think Italy is out of the sovereign debt spotlight, and today’s signal from Italy’s Treasury does more harm than good to a very fragile investment community.
We remain short Italy via the etf EWI in the Hedgeye Virtual Portfolio.
Matthew Hedrick
Analyst