LNG Capital CIO sees Italy referendum loss, debt sell-off

By Simon Jessop

LONDON (Reuters) – The founder and chief investment officer of credit hedge fund LNG Capital said the Italian government will likely lose a December referendum on reforming the structure of the government, triggering a sell-off in Italian government debt.

London-based Louis Gargour, who runs $100 million across several European-focused strategies, told the Reuters Global Investment Outlook Summit he put the probability of Italian Prime Minister Matteo Renzi losing the vote at 55 percent.

“I believe that the vote will be negative, he won’t get the new reforms he wants. If Renzi loses the referendum, we think Italian government bonds are due a very big correction,” versus German government debt of 30 or 40 basis points, he said.

“I’m considering positioning that short in the near future. We’re actually trying to trade into the rally we’ve seen over the last couple of days.”

Since referendum jitters fully kicked in in August, the premium that investors demand to hold Italy bonds rather than ultra-safe German Bunds has gone from just over 1 percent to over 1.6 percent, Thomson Reuters data showed.

With the bank-sector restructuring at the heart of Renzi’s plan for change still some way off, it was too early to get involved in the country’s bank debt, Gargour said.

“We continue to dislike European banks because we haven’t seen any relevant restructuring. We’re very concerned about Italy,” he said, citing the example of Monte dei Paschi, which recently announced plans for a bond-to-equity swap.

“Monte de Paschi is a very big hole and we think that the government has not done the ‘good bank-bad bank’, as they did in Spain and other countries,” he said, referring to the hiving off of non-performing loans into a separate entity.

The resurgence of right-wing politics that could be Renzi’s undoing had the potential to impact a string of European elections next year, he said, including France, where he was also considering going short.

With U.S. rates likely to rise and as the European Central Bank comes under pressure to cut its bond purchases in early 2017, Gargour said he had a 20 percent net short exposure and cash at 30 percent amid the potential for sharp market moves.

A week after the election of Donald Trump as U.S. President, Gargour said he was also running the slide-rule over U.S. credits in sectors such as energy and banks, both of which could get a boost from changes to U.S. economic policy.

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