BTPs, Bunds And Berlusconi: Do Markets Care About Italian Politics?

Includes: EWI, FXE
by: The Motley Monetarist

Italian politics never ceases to entertain. Silvio Berlusconi, the center-right political leader who has more than nine lives, is threatening to bring down the current coalition government if he is expelled from the Senate. Prime Minister Letta has warned that the continual strife will hinder any economic recovery, but are markets really concerned about the goings on in Palazzo Madama? The current coalition government was sworn in on April of this year, at the same time that an unemployed bricklayer from Calabria opened fire on police, aiming, it seems at the politicians, substituting two hapless carabinieri instead. Luigi Preiti, burdened with debt and desperate, opened fire on police in the square outside the premier's office while Mr. Letta was being sworn in, Italian theater in its purest form.

Italian economic vital signs look good.

Politics and economics seem to be operating on a deep divide in Italy. In Italy, markets seem to be operating in one reality, economic forces in yet another and Italian politics in the sweet chaos that has characterized it since the second world was, or as the Economist has put it less charitably, a dangerous mess . Consider the following comparative statistics released in the Banca d'Italia Public and Finance statistics supplement published recently. The only worrisome sign seems to be the higher than usual level of interest payments as a % of GDP.

Net borrowing as a % of GDP

Current account balance as a % of GDP

Gross public debt as a % of GDP

Tax revenue and social security contributions as a % of GDP

Interest payments as % of GDP

Capital expenditure as a % of GDP








EU (excluding Italy)







Source: Banca d'Italia, statistical supplement to statistical bulletin: Monetary and financial indicators.

Spread with bunds narrows.

Of course, the next big political event in the eurozone is the German election. But whatever happens with Mme. Merkel's coalition, markets seem to be operating in alternate reality already, somewhat ignoring political developments, since the yield on ten year Italian bonds fell seven basis points last week. This is hardly a new trend, continuing a progressive optimism about Italian BTP's, as can be seen from the following chart.

(Click to enlarge)

Source: and

According to the Bundesbank, June witnessed net redemptions of ten year German bunds, to the tune of 10.6 billion euros, in favor of a net placement of 5 year Federal notes ( 4.8 billion euros) and two year notes (4.8 billion euros), reflecting a movement towards the short term by the Bundesbank. Conversely, the above chart shows significant structural trends in favor of Italian long-term bonds.

Bullishness in the December 2013 long-term BTP futures contracts.

Even more revealing is what the futures rate reveals about market anticipations within the next 3 months. For instance, the Eurex long-term BTP futures rate for delivery December 2013 reveals both anticipations of increasing yields and lively market trading, based on the upswing in the open futures position recently.

(Click to enlarge)

Source: www.

What about anticipations about the euro?

The spot rates on short-term Treasuries also carry some messages about how markets anticipate the euro 6 months ahead. Whereas the spread a year ago between 6 month Italian notes and 6 month U.S. Treasuries denoted an appreciating dollar (or at least so the markets thought), the decreasing spreads recently shows exactly the reverse, with a recent change in market anticipations but a blip in the overall recent bearishness evidenced with respect to the dollar.

(Click to enlarge)

Source: and

Conclusion: Bond markets, both derivatives and spot seem to echo underlying economic trends in the Italian economy. Most importantly, the stability of the economic fundamentals belies the squabbling between the different factions in the Italian government, representing a long-standing disconnect between Italian politics and markets. Italian politicians can continue to fight, have a penchant for underage mistresses and keep true to their role of livening up European politics, currently in the dead season of August. Markets don't seem to really care.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.