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Italy’s New Government Is Winning Investors Over. But For How Long?

Italy’s New Government Is Winning Investors Over. But For How Long?

(Bloomberg) -- Massimo Perotti has been waiting for the right moment to list his luxury yacht maker on the Italian market. That time is now, he reckons.

He’s betting investors will be more willing to put their money in a country whose government has rejected the in-your-face populism that put it at odds with the European Union and roiled its stock and bond markets. With Prime Minister Giuseppe Conte’s new government talking up Italy’s commitment to Europe and bringing in a finance minister with years of experience at European institutions, investors have been won over.

Italian bonds have soared, with 10-year yields at about 0.9%. The FTSE MIB Index of the 40 most liquid and capitalized stocks listed on the Borsa Italiana has jumped more than 21% year-to-date, putting it among the 10 best performers in the world. Most of the gains have come after the populists exited the government.

Italy’s New Government Is Winning Investors Over. But For How Long?

“The stability brought by the new government is helping a lot,” Perotti, the 58-year-old chairman of Sanlorenzo SpA, said in an interview. “Investors will be reassured by a more moderate, pro-European government.”

But for how long? Skeptics ask what has fundamentally changed. They point out that the new government’s policies will do little to address Italy’s twin woes of massive debt and low productivity. While the new, more pro-EU rhetoric has had an effect, they note that the dramatic fall in bond yields since the summer has mostly been fueled by cheap money from the European Central Bank and investors’ hunger for carry trades.

Italy’s New Government Is Winning Investors Over. But For How Long?

“The new government must have found a money tree, because they seem to suggest they can cut taxes, raise spending and keep the deficit flat compared to last year even though growth is getting worse,” said James Athey, portfolio manager at Aberdeen Asset Management. “I am still not bullish about Italy, and I am actually short.”

‘Toxic Mix’

With Italy on track to rack up a budget deficit in 2019 of about 2.2% of gross domestic product and with its debt standing at 138% of GDP, Athey is wary.

“That’s a toxic mix,” he said.

Even members of the government acknowledge that much of the change so far has been in tone rather than in substance. The government’s “pro-European positioning” has had “a positive effect,” Finance Minister Roberto Gualtieri said in an interview with Corriere della Sera. Having figures in the previous administration who “continually raised scenarios other than permanently staying in the euro had a significant cost for the country,” he said.

The exit from the government of the rightist League party has been a relief for investors and corporate leaders. While he was in power, League leader Matteo Salvini tacitly encouraged talk of a euro exit among party lawmakers while his stormy relations with coalition partners and strong poll numbers worried investors.

The knife-edge approach to daily political life kept markets nervous. The spread to German debt peaked after the League’s strong showing in the May European Parliament elections and spiked again as Salvini precipitated a government crisis in August.

Italy’s New Government Is Winning Investors Over. But For How Long?

All that has changed with the new administration.

“There is no more risk of anti-Europe rhetoric and policies,” Former Prime Minister Mario Monti said in an interview. “The new government -- with the same prime minister -- has made clear it agrees to respect EU rules. We’ve seen a complete change of investors’ mood.”

With the political cloud receding, investors can focus on fundamentals, said Philippe Donnet, chief executive officer of insurance company Assicurazioni Generali SpA.

“The risk perception of Italy was exaggerated before, it’s not Greece,” Donnet said in an interview in Milan. “We’re now getting closer to the country’s real risk level, the spread could fall further, as Italy has shown it’s a mature democracy.”

The yield decline would equate to savings of as much as 18 billion euros ($19.8 billion) by 2022, Conte said in Milan this month.

Little Credibility

Yet how long will it be before the euphoria over the new government evaporates?

Spending plans for 2020 already require the EU to max out the flexibility it can offer to Italy. Critics charge that some targets for next year, including revenue from improved anti-evasion measures, are overly optimistic. And the new coalition has struggled nearly as much as its predecessor to reach internal agreement on priorities.

“In my opinion the plans as announced so far lack any credibility whatsoever,” said Athey. “Medium term I see nothing but problems for the euro-zone as a whole.”

--With assistance from Chiara Albanese, Chiara Remondini, Sonia Sirletti and Flavia Rotondi.

To contact the reporters on this story: Jerrold Colten in Milan at jcolten@bloomberg.net;Tommaso Ebhardt in Milan at tebhardt@bloomberg.net

To contact the editors responsible for this story: Alessandro Speciale at aspeciale@bloomberg.net, Vidya Root

©2019 Bloomberg L.P.