Recovery Plan, here is money, bonds and bonds
Giuseppe Liturri's analysis
The propaganda tsunami that will reach Rome on 22 June has started from Lisbon. It is the president of the Commission in person, Ursula Von der Leyen, who has begun the tour of the capitals of the states whose recovery plans have been positively evaluated by the Commission. Madrid, Athens, Copenhagen and Luxembourg will follow. But Von der Leyen will not arrive empty-handed. It will bring as a dowry the success of the first issue of bonds to finance the expenses envisaged by those plans.
The Lisbon meeting had the tone of a documentary of the Twenty-year period by the Istituto Luce. We dare not imagine what could happen in Rome. “A lot of work awaits you”, commented the President, brandishing the text of the Commission's approval proposal; "Can I go to the bank now?" Prime Minister Antonio Costa asked; "You can go to the bank," the German replied. Too bad he could find his account blocked, because the Council still has four weeks to adopt the Commission proposal by a specific decision.
Portugal will receive subsidies for 13.9 billion and loans for 2.7 billion and appears to have achieved, in the 11 "subjects" according to which the plan is evaluated, 10 "A" and one "B". A selection grid that leaves no way out and does not allow "C" grades in qualifying subjects, such as compliance with country recommendations (those that require us to tax real estate, so to speak).
Examining the documents of the Portuguese plan, the meticulousness with which every single project is evaluated is truly amazed. An enormous planning effort, condensed into over 300 pages, in front of which the five-year plans of the planned economy of Stalin's memory could pale. The Portuguese plan is useful because it contains, in a nutshell, everything that is being prepared for Italy: task forces, mission units, an elephantine bureaucratic effort. All and only to prove that the EU exists and allow it to intervene between the financial market and the Member States to do what the latter have done for centuries: issuing debt to finance investments.
To this end, last Tuesday the Commission issued 10-year bonds worth 20 billion at a rate of 0.086%, 32 basis points above the German bond with the same duration, with demand equal to about 7 times the offer. We learned from qualified sources that the Chinese Central Bank was the largest underwriter, with approximately 1.8 billion allocated.
This is the most consistent placement in the history of the EU, which finds a comparable precedent in the first issue to finance the Sure instrument, which took place on 20 October 2020, placing 17 billion with rates of -0.24% at 10 years and 0.13% at 20 years old.
Although the rate increased from -0.24% to 0.09%, the spread against the equivalent German bond is essentially unchanged (37 basis points then, 32 today). Two other important issues will follow in July, reaching 100 billion by the end of the year, including short and medium / long-term securities.
The media drum has used triumphal tones, rather than being ashamed of an instrument that does little and late, reaching the coffers of EU states many months after an unprecedented peacetime recession occurred. In the US, times were measured in weeks. Between Corriere della Sera and Sole 24 Ore it was a competition to enhance the historical moment and underline the convenience for Italy of these loans compared to the normal 10-year BTP issue. Not to mention the ill-concealed hopes that these bonds – which are not Eurobonds because there is no joint and several liability, but only pro-quota on the part of the States – will become permanent.
Given that even the Italian 10-year received demand equal to about 7 times the offer just a few days ago, the comparison between the 0.77% rate of the latter and the 0.09% of the EU bond is an exercise that would lead to rejection of any unfortunate first-year economics student. It is not an opinion, as we happened to read about the sun .
In fact, it fails to consider:
1) the de facto privilege (seniority) enjoyed by EU loans with respect to BTPs, clearly stated in the loan agreement (still partly secret) governing the Sure instrument.
2) The load of conditions weighing on EU loans, under various aspects, which cannot fail to have a price: compliance with the country recommendations and the Stability and Growth Pact, with their recessive effect; The constraint of well-defined spending destinations, in favor of the ecological and environmental transition and numerous other limits.
3) The 0.09% rate, considered deceptively convenient, is only a gift to investors who find themselves receiving about 30/35 basis points more than the German Bund with a substantially equivalent level of risk. In fact, the system of guarantees governing these issues is so broad (0.6% of the GDP of each state) that, even if all the Member States fail, the share of Germany's budget alone (about 20 billion) would be sufficient. to cover annual repayments up to 2058.
We have outsourced a substantial portion of the management of our public treasury needs to an external agency, whose financing strategies we hope will be successful, and which will make us suffer if, before each six-monthly payment, we have not made all the famous reforms .
A permanent blackmail at least until 2026.
(Extended and updated version of an article published in 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/recovery-plan-ecco-soldi-bond-e-vincoli/ on Sat, 19 Jun 2021 08:53:29 +0000.