Here are the risks for Italy with the moves of the ECB
Italy loses decisive support in the placement of public debt, and the ECB's promise to combat "fragmentation", that is, the spread out of control, remains very vague. Mario Seminerio's analysis for Daily Tomorrow
The European Central Bank, in its meeting on 9 June, certified what had already been known for some time: the end of the negative interest rate policy. At the July meeting, the key rate hike will be 25 cents, to continue in September when, if medium-term inflation forecasts persist or deteriorate, the hike would be higher, likely in the order of 50 basis points. The announcement effect alone causes market yields to rise, being part of the "dirty work" of monetary tightening on behalf of the ECB.
Net of the usual joke on optionality, flexibility and dependence on future macroeconomic data, so as not to pre-engage the monetary policy path, this is the outcome of the compromise between hawks and doves within the governing council.
The former, troubled by inflation and by the risk that the expectations of economic agents go “unanchored”, that is, that a price-wage spiral will start; the latter (including the Italian Fabio Panetta in the front row) to preach caution given that the price shock originates from the supply side, between war and supply chain bottlenecks, and not from demand.
THE RISK FOR ITALY
The ECB's decision is "historic" because, after years of supporting the deficits, especially in our country and during the acute phase of the pandemic shock, now the risk for Italy is to lose a decisive buyer for our public debt . The trend in the spread between BTPs and Bunds indicates the fears of the market in a phase of rising yields, penalizing large debtors.
The term for the purchase of securities by the ECB was then confirmed with effect from 1 July, while confirming that it will continue to reinvest the securities maturing “at least until the end of 2024”.
In this regard, for months the ECB itself has been "phoning" the market with the intention of taking action to avoid the so-called fragmentation, that is, that the spread of the most indebted countries goes out of control. In the press release this intention is confirmed but not detailed at the operational level, and this helps to explain the strong negative reaction of the spread.
It is reiterated that, to avoid turbulence, reinvestment purchases can be calibrated over time, by asset class and jurisdiction. Translated, it means that in an emergency it will be possible to buy BTPs in a clearly prevalent (or exclusive) way with respect to what is foreseen by the shares of the individual countries in the capital of the ECB. Even if the Bund will expire.
Attention to this point: it would be a full-blown monetary bailout, which would certainly bring with it new conditionalities, elaborated within the European Commission with ratification by the ECB. But it is already certain that conditionality would not rhyme with deficit.
Therefore, a heavy “Italy risk” returns to arise, made up of insufficient growth and lower than the cost of debt and which forces us to substantial primary surpluses which further slow down expansion, fueling social tensions and populist initiatives. The next legislature, which, seen from today, seems a geological era distant given the market conditions, risks being an even more critical repetition of the beginning of the current one.
DANGER OF RECESSION
The great unknown with which the markets are measured also looms over the European economic situation: will the Federal Reserve be able to cool inflation (at least, demand inflation) without causing a full-blown recession? And how long will conditions of high commodity prices persist as a result of the sanctions against Russia?
As far as we are concerned, this question takes on an even more worrying significance, given that we are a country with high indebtedness, which therefore from general recession conditions could suffer severe deterioration of public accounts and a crisis of confidence among international investors. In this case, the return of the infamous ESM, the European Stability Mechanism, cannot even be ruled out.
From this end of the era of the saving interventions of the ECB, a ferocious constraint will return to the imaginative chatter of politics. The dreamlike anthology of electoral promises that awaits us between now and the elections risks withering against the wall of reality, perhaps with the re-edition of a government led by a savior of the homeland, or at least of an adult figure of external guarantee. Whose identikit strikingly resembles that of the current Prime Minister.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/ecco-i-rischi-per-litalia-con-le-mosse-della-bce/ on Sun, 12 Jun 2022 05:13:34 +0000.