Wall Street likes Monti, but still wary of Italy

Follow us

A solid financial firewall must be established in Europe to prevent crisis from spreading, those who welcomed Monti to Wall Street said after he returned to Rome.

"It's been impressive how quickly the sentiment has changed on Italy," said Charlie Himmelberg, managing director at Goldman Sachs, noting that the euro zone central bank had helped.

"With the ECB's LTRO (Long Term Refinancing Operation) having removed much of the funding pressure on banks, the bigger risk now would be renewed sovereign concerns due to weaker-than-expected macro data. The recession in Italy is continuing; it is only a matter of how long and deep it will be.

"We've been constructive on Italian bonds, but now that spreads have tightened, we are closer to fair value."

The spread peaked at 576 basis points in mid-November. Since then, the 10-year yield spread between Italian and German bonds, a measure of the market's perceived risk, fell to a low of around 345 points last week.

With Italy needing to refinance a massive 60 billion euros by April, bond experts say there is a real possibility of the spread widening again, or at least limited room for immediate further improvements.

"In the best case the (10-year spread) can fall to around 200 basis points by the end of 2013," said Alessio De Longis, with the global debt team at OppenheimerFunds. For the Monti government, after its brilliant start, "the toughest part comes now," he said.

REFORMS, GROWTH ARE ESSENTIAL

"It is a good thing that Monti visits investors," said Blaise Antin, head of sovereign research at TCW, in Los Angeles. "But plenty will ultimately depend on the Italian parliament" and how it will back the tough choices ahead.