1 Dec 2011
In the meantime the country’s borrowing rate has crept up to dangerous levels.
According to a new study conducted by Covip, the Italian pension fund watchdog, nearly 61 percent of the total capital of private workplace pension funds was invested in government bonds at the end of last year, 47.4 percent of which was invested in Italian debt.
Italian pension funds managed a total amount of some €22.3bn at the end of 2012. While this is not particularly large by European standards, many Italian governments over the years have attempted to widen the use of contribution-based and voluntary schemes to lessen the pressure on the public INPS pension fund.
The CEO of Magusta Risk, Andrea Canavesio, said, “Italy is heading toward a restructuring of its debt. If you also consider that they tend to have an investment bias toward Italy, so an exposure to the country also via other asset classes such as equities and corporate bonds, this is becoming a systemic risk for them.”
Meanwhile yields on 10-year government bonds this week escalated to above the psychologically important barrier of seven percent, which is a level that is widely regarded as unsustainable, especially in a country that has consistently low levels of growth. When yields on government bonds in Ireland, Portugal and Greece reached this level, those countries were forced to seek a financial bailout from the EU and the IMF.
Even more worrying is the fact that we have seen inverted yield curves during the past few weeks, whereby five-year yields were higher than 10-year yields. This indicates that investors consider Italy a very high risk in the short-term. According to Canavesio, this is “typical of countries close to bankruptcy”.
By late November, yields on 10-year government bonds had dropped somewhat, to 6.59 percent, which is still extremely high compared to the GDP growth rate of just over three percent predicted for the next three years.
A number of pension providers have tried to downplay the risk they are facing. They pointed out that pension funds were held by long-term investors who would normally hold the debts until they matured.
Maurizio Agazzi is the director of the biggest ‘second pillar’ scheme in Italy. His company manages around €5.5bn in assets. He says they are monitoring the situation on a daily basis and added, “Our objectives are long term. As asset managers we make tactical investment choices in total independence within pre-defined benchmarks and control parameters.”
The person in charge of fixed income at Investec, John Stopford, said that the only buyer right now was the European Central Bank. He noted that there was a very real risk of a credit crunch in Italy and that many investors were “exiting Italian positions”.