Despite the clouds of a further rise in interest rates by the ECB and a recession that seems increasingly inevitable on the horizon, there have been no landslides on the markets in recent days. Yesterday the spread closed down by 6.7 basis points at 232, driven by the drop in BTP yields which stood at 4.2%.
In short, the situation, for Italy, seems calm. Are you all right then? Not really. Not only because the interest on Italian 10-year paychecks doubled in just six months (at the beginning of April they were 2.08%), but also, and above all, because it is the whole European Union that is in rather troubled waters. To the point of pushing the European Systemic Risk Board (ESRM), the supervisory body of the financial system, to issue for the first time since its establishment in 2010 an unusual “Notice” relating to the “serious risks to European financial stability” . Risks that would arise from a toxic combination of recession, financial market tensions and a reduction in the value of assets held by banks and investors.
Meanwhile, the Composite Indicator of Sovereign Stress, an indicator calculated by the ECB to measure stress on the government bond markets, is at its peak since August 2012. In September it reached 0.46 against 0.1 in January, while in November 2011, when the sovereign debt crisis was at its peak, it reached 0.55 points. But looking ahead, the markets could be agitated even more by the “protective shield” for families and businesses launched by the German government last week.
Unlike the 65 billion package at the beginning of September, which was financed by new taxes, the 200 billion euros available to the “Economic Stabilization Fund” to control electricity and gas prices and recapitalize businesses will be obtained in debt. And this at a time of particular tension for the markets, as evidenced by the financial storm that hit the United Kingdom.
But there is more. Since from 2023 Berlin has decided to restore the so-called “debt brake”, a constitutional rule according to which the deficit cannot exceed 0.35% of GDP, the 200 billion allocated to the Fund will have to be found by the end of the year. In short, the risk is that the hasty move by the German government could make the markets nervous. We must then consider the 22.5 billion of additional debt that the Ministry of Finance decided to issue in the last quarter of the year. In total, it is therefore more than 222 billion short and long-term securities that will flood a market that for some months has lost its main buyer for ten years now: the ECB. Since July, in fact, Frankfurt has limited itself to reinvesting the proceeds of the securities that reach maturity without increasing its already abnormal balance sheet (8,500 billion euros). In short, the fact that the ECB will no longer actively intervene on the markets in the face of German monstrous issues arouses some fear. Above all for Italy, which will have to place 64 billion euros between BTPs, CCTs and other medium and long-term instruments over the next few months. In the same period, the ECB will have available for the entire euro area just over 60 billion euros deriving from maturing securities purchased with the PSPP, the instrument launched in 2014. The hope is that the “flexible” reinvestments of the pandemic program, the Pepp, which between June and July led to net purchases of Italian debt for 9.7 billion, may be enough.