The ECB “discharges” the Italian debt: what does it mean?

In the days following the elections, a “mine” arrives on Italy that will be carefully managed in the coming months because it has to do with the weakening of the shield that has defended the country in recent years, especially after the outbreak of the Covid pandemic- 19: the securities purchase plan of European Central Bank. The summer tightening on purchases announced by Christine Lagarde with the stop at Pandemic Emergence Purchase Plan (Pepp) launched during the pandemic, it entered into force at the end of July and data on Eurotower movements on sovereign debts between August and September show a withdrawal of the ECB’s coverage on the sovereign bonds of Italy and other countries.

In fact, between August and September, the ECB took a step back on bond purchases, reducing by 1.243 billion euros the share of BTPs held, however close to 300 billion euros within the Pepp. Not an isolated move, given that the Eurotower did not renew over a billion Spanish and Greek stocks in the same period.

All this after in the two months of June-July the ECB had given aid to the bonds of the periphery of the Eurozone, helping to reduce the yield differentials and to contain the spread, with over 17 billion in total net purchases, 10 of which reserved for Italy.

We are entering the so-called quantitative tightening, or the great retreat from the stock purchase plans inaugurated by Mario Draghi in 2015 and strengthened by Lagarde with Covid? Not according to the Eurotower. “It’s just a physiological recalibration,” explain internal sources heard by The print, which refer to the conclusions of the recent Board of Directors and report that the position of the ECB remains that of a month ago, and that is that the ECB “intends to reinvest the capital repaid on the securities maturing under the program at least until the end of 2024”, after Lagarde’s parallel announcement of rate hikes and withdrawal from quantitative easing in June had wreaked havoc on the markets. But in fact, in August-September the ECB, for the first time since the start of the pandemic, divested and chose to renew securities for an equivalent value of 4.3 billion euro held in the overall portfolio of European bonds.

Financial sources heard by Ansa recall instead that in their opinion the ECB may not have yet wanted to reinvest Italian securities that it had in its portfolio and which have come to maturity. Therefore, by not activating, not considering it appropriate to do so, it is anti-spread shield announced in July.

What does all this mean for Italy? A first interpretation is that of a wait-and-see ECB, which works on rates and at this stage is cautious on securities to avoid irritating the “hawks” who are asking for a total stop to quantitative easing in the absence of any further need for economic stimulus. For Italy this means that the Eurotower would intervene on the spread or debt only in case of extreme necessity. To date, the differential with the German Bund is around 240 points: still far from the guard level, but more than doubled compared to the most active phase of the Pepp, in which it was around or even below 100 basis points.

A second perspective is that of a political message aimed at “testing” the Europeanism of the winning coalition at the polls led by Giorgia Meloni. By demonstrating that it can open or close the taps for the securities of a country at will, the Eurotower may have wanted to send a veiled message: we have chosen not to reinvest today, we could choose not to do it again tomorrow, for example in the case of an arm of iron between Meloni and Brussels on PNRR or maneuver, and therefore this shows Rome that Frankfurt remains the decisive actor for Rome’s financial security.

Third hypothesis is linked to the desire to understand to what extent investors and markets can, at this stage, be “alternates” of the EU investor in supporting the debts of Eurozone countries to recalibrate future purchase plans inside or outside the shield anti-spread. The reasoning, in this perspective, is linked to the fact that with ten-year European debts that reach yields between 4.5 and 5% in countries such as Italy and the partners of Mediterranean and southern Europe, the country risk is adequately compensated by coupons planned for the future.

The last scenario is linked to the prospect that, politically, the terrain for the application of the anti-spread shield and the purchases of securities in an emergency form to help the Eurozone countries in difficulty on yields and differentials has not yet found a precise definition. Above what threshold to intervene to heal an excessive gap? With what timing? With which measures to start? All questions that the ECB is asking while on the Board of Directors different views are compared, from that of the German hawk Isabel Schnabel who pushes for high rates and low reinvestments to that of the Irish “dove” Philip Lane, chief economist who also gave advice on coordination between monetary and fiscal policy for the reduction of inequalities.

The anti-spread shield, it was understood, will have a strong discretionary component and in this context the ECB’s moves can open both to a stalemate, and therefore financial uncertainty for Italy, as well as to show confidence in the prospects of the ‘Italy. With this in mind, moves of this type require Italy to be ready to guarantee the decisive factor political presidency on the Eurotower to direct, when and if necessary, the stimuli on Rome and take away from hawks and rigorists the power of life and death on the repurchase plans which, this must be taken into account, are not taken for granted. Italy can count on a fundamental presence at the ECB in the board member and very loyal of Mario Draghi, Fabio Panetta, who is very often spoken of as the next Minister of Economy and Finance. But now, more than ever, Panetta’s role must be that of bridge between Rome and Frankfurt and guarantor of the possibility that the ECB’s moves will never backfire in a mass divestment of the BTPs due to political prejudices towards the nascent government.

Source link

About Eric Wilson

The variety offered by video games never ceases to amaze him. He loves OutRun's drifting as well as the contemplative walks of Dear Esther. Immersing himself in other worlds is an incomparable feeling for him: he understood it by playing for the first time in Shenmue.

Check Also

A scholarship week can be worth a whole year of waiting

The financial markets are the realm of surprises and if someone dares to have convictions, …

Leave a Reply

Your email address will not be published. Required fields are marked *