Italy's Monti in 'vulnerable position', says Bluebay's Dowding

The Italian government is once again in a vulnerable state following the announcement the country's centre-right party has withdrawn its support for Mario Monti's economic reforms, according to Bluebay's bond manager Mark Dowding.

Voting against the proposed reforms, the action of former prime minister Silvio Berlusconi's centre-right party (PDL) suggests that technocrat Mario Monti's government is at risk of falling.

The vote comes at a sensitive time for Italian government bonds that have seen pressure ease in the second part of this year and currently trade around 4.5% yield.

'The move by the PDL to abstain in today's Italian government vote leaves the Monti government in a vulnerable position,' Dowding told Citywire Global following the news.

'If the PDL look to push this issue, then early elections in February become inevitable. Elections are scheduled for April anyway, but there is a risk of adverse headlines causing investors to focus on the political risks in Italy.'

Dowding, who manages the BlueBay Investment Grade Euro Govt Bd fund, said he retains a neutral stance in Italian government bonds and he has so far not changed his position following the news today.

'We hold the view that elections could possibly lead to an inconclusive outcome, paving the way for Monti to stay on as Prime Minister in a coalition government.'

'Italian markets would benefit from Monti remaining in power, but uncertainty surrounding the possible outcomes could see BTP yields under some pressure,' he added.

Draghi: no comment

ECB president Mario Draghi declined to comment on the PDL vote on Thursday.

In the monthly press conference that triggered a fall in euro trading, Draghi announced the central bank would reduce their forward looking growth forecasts by more than expected.

The ECB's growth projection for 2013 was cut as it now expects growth to hover between 0.3% and -0.9% next year. Interest rates were also kept unchanged, increasing expectations for a cut at the next monthly meeting.