UBI Pramerica Buys Italian Debt, Shuns Greek Bonds (Update1)
March 17, 2010, 8:44 AM EDT(Updates prices in seventh, eighth, 15th paragraphs.)
By Matthew Brown
March 17 (Bloomberg) -- UBI Pramerica SGR SpA, which oversees 22 billion euros ($30.3 billion) in fixed-income assets, is buying Italian government bonds after selling most of its Greek debt holdings as it seeks lower-risk returns.
UBI Pramerica, which sold 750 million euros of Greek bonds between November and February, is betting the country may not be able to narrow a budget deficit that is the largest in the European Union, said Luca Franchi, the company’s head of fixed income and currencies. Italy’s budget deficit in 2009 was 5.3 percent of gross domestic product, compared with 12.7 percent for Greece, 11.2 percent in Spain and 8 percent for Portugal, according to EU estimates.
“Among the PIGS, Italy is the best from a risk-reward point of view,” Franchi said in a telephone interview from his office in Milan on March 15. “The return provided by Italian bonds is potentially exposed to lower risk than Portugal or Spain.” PIGS is a term used by some investors to refer to Portugal, Italy, Ireland, Greece and Spain.
The government of Prime Minister Silvio Berlusconi introduced a range of measures such as corporate tax breaks, helping Europe’s fourth-largest economy exit the recession in the third quarter last year. While the economy contracted again in the fourth quarter, it’s set to grow 0.7 percent this year, according to the Bank of Italy. The Greek government forecasts its economy will shrink 0.8 percent.
Italy’s Finance Minister Giulio Tremonti has a “firm hand” on Italy’s public finances, keeping deficits down even as the economy contracted, Goldman Sachs Group Inc. said in a report to investors in February.
‘Much Worse’
Berlusconi said Feb. 10 countries such as Greece, Portugal and Spain were doing “much worse” than Italy.
The extra yield, or spread, that investors demand to hold Italian 10-year bonds over German bunds will fluctuate between 65 basis points and 95 basis points this year, Franchi said. It was at 80 basis points as of 12:37 p.m. in London, compared with an average of 38 basis points over the last 10 years, according to Bloomberg generic data.
Greek Prime Minister George Papandreou is struggling to convince markets that he can reduce a budget deficit more than four times the EU limit. The Greek spread reached 396 basis points in January and was at 299 basis points today, compared with an average of 59 basis points over the last 10 years.
The Greek parliament this month approved 4.8 billion euros in spending cuts and tax increases, the administration’s third round of austerity measures since taking office in October.
‘Possible’ Bailout
EU finance ministers meeting in Brussels this week worked out a strategy for emergency loans to Greece in case the country’s plans fail.
“Short term, there will probably not be a bailout,” Franchi said. “Next year, it is possible.”
UBI Pramerica will consider buying Greek debt again “if we see the government is really committed to implementing those measures in the face of stronger popular discontent,” he said.
UBI Pramerica is also buying German debt rather than that of other so-called core European nations, because the yield premium for holding French and Dutch bonds isn’t enough to compensate for the increased risk.
“Among the core, the spread with Germany is so low, if there is a flight to quality, the spread has more potential to widen, while the potential to tighten is limited,” Franchi said.
The German-French 10-year spread was at 29 basis points, while the German-Dutch spread was 26 basis points.
UBI Pramerica is the fund management unit of Unione di Banche Italiane SCPA.
--With assistance from Andrew Davis in Rome. Editors: David Clarke, Justin Carrigan
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net
To contact the editor responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net
