How will Italy disentangle between liquidity, the ECB and the Recovery Plan?
Giuseppe Liturri's analysis
It thundered so much that it rained. On 3 August we announced the arrival of the transfer from Brussels as imminent, not failing to underline the relative delay, and on Friday 13 the Commission made the payment of 24.9 billion as an advance of 13% of the total of 191 billion. of the Resilience and Resilience Facility (RRF, which constitutes a large part of the EU Next Generation).
In the same days, the Ministry of the Economy announced that the liquidity in the availability account at the Bank of Italy and other treasury investments had reached a record figure of 115 billion as of July 31st. A level historically never reached.
In short, while we have been struggling for more than a year now to obtain from Brussels the approval and financing of an investment plan characterized by precise constraints in the destination of expenditure, by reforms approved in stages forced by Parliament, by a colossal bureaucratic effort to reporting and control and – last but not least – compliance with the obsolete parameters of the Stability and Growth Pact, in our coffers there is already more than half of the amount we should spend in the next 5 years.
Mind you: with a state sector balance that in the first half of 2021 showed a borrowing requirement of 85 billion (up from 95 billion in the same half of 2020) , it is normal for the Treasury to manage a liquidity buffer that has a consistent level with the expected cash flows. As the experience of March 2020 shows, when while the ECB, as usual, was slow to make decisions and the BTP-Bund spread was dangerously dancing around 300 points, in via XX Settembre they preferred to use liquid assets for a good 43 billion, leading them to touch the minimum at 30 billion.
The abundance of liquidity is such that on 22 July the Mef even announced the cancellation of two BTP auctions scheduled for the following weeks and the 12-month auction on 11 August recorded a new low in yield, stood at -0.51% from the -0.46% of the July auction.
The causes of this favorable situation are essentially two: on the one hand, as aforementioned, the decreasing government borrowing requirement and, on the other, the sustained pace of the placement of government bonds in the first half of the year. The lower state borrowing requirement is above all the effect of the good trend in tax revenues in the first half, with an increase from 186 billion in 2020 to 213 in 2021. Considering the anomalous trend of 2020, 2021 does not look bad at all even compared to 2019 and 2018 (200 and 198 billion respectively). But it is from the issue of securities that most of the spoils come: in the first half of the year, net issues amounted to 118 billion, bringing the stock of public debt as at 30 June to 2,696 billion (2,611 net of liquidity). With the issuance of securities we covered the state needs and we also put hay in the farmhouse, replenishing the cash for the dark times. And these bond issues had only one buyer: the ECB.
To those who are impressed by the growth of public debt since the outbreak of the pandemic (from 2,373 billion in February 2020 to 2,612 billion in June 2021: +239 billion) it would be enough to point out that in the same period the ECB made purchases with the two PSPP programs. and PEPP for 266 billion (including July 2021) to which the Bank of Italy contributed directly for 208 billion as of June. All this by exploiting the unlimited power of central banks to purchase those securities by crediting the equivalent value to the accounts that the selling commercial banks hold at the issuing institution, with a simple accounting entry. What about inflation? As the famous economist Kenneth Rogoff said, “ being afraid of inflation is like worrying about measles, when you are at risk of falling ill with the plague ”.
Unfortunately, mainly due to a flawed institutional architecture of the Eurozone, these purchases were made on the edge of the violation of the Treaties, driven by the markets in turmoil. The dominant role of the ECB has a price that could prove to be very heavy for our country and the NgEu is the bill we signed to reassure our European partners that for the next 30 years our country will be a faithful executor of the regulations of Brussels and Frankfurt. , where they know well that Italy has an economy equal to eight times that of Greece and must be firmly secured. So, on the one hand you buy and on the other the strict rules of the NgEu. Hence the 526 qualitative and quantitative objectives (51 of which by 2021) staggered until 2026 to access each of the 10 half-yearly installments. In 2021, to access the first installment of 24 billion (from which the deposit received on Friday will already be deducted), 106 projects will be activated in the various missions which, however, also include works for 51 billion already started or that would have been so even without NgEu , a way to further increase Brussels' grip on Rome.
Confirmation that the money for the planned investments was not a problem can be obtained by noting that the installments disbursed by the EU – provided that all the objectives are achieved – will be a mere reimbursement compared to sums already foreseen in the budget (33 billion in 2021 and 118 in the three-year period).
Not having a normal central bank means having to finance a dutiful investment program, forcing us to bear a burden of conditions whose weight we will soon “appreciate”.
(Updated and integrated version of an article published in the newspaper La Verità)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/come-si-districhera-litalia-fra-liquidita-bce-e-recovery-plan/ on Sun, 29 Aug 2021 08:00:23 +0000.