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The ECB, Draghi’s accounts and Germany’s madman risk

3 years ago babelfish

The ECB, Draghi's accounts and Germany's madman risk

Giuseppe Liturri's analysis

When it comes to Italy and its public debt, although August is now behind us, the temperature begins to rise between Brussels and Frankfurt.

The first indications of the intentions of the ECB's Governing Council regarding the extraordinary public bond purchase program (PEPP) launched in March 2020 should arrive today from the Eurotower.

The positioning maneuvers of the "hawks" and "doves" have been underway for days and the signs of nervousness are tangible. The former, faced with early signs of economic recovery in the second quarter, want to reduce purchases, to the point of not using the entire available ceiling of 1,350 billion. The latter warn that any reduction is premature and that the signs of a recovery in inflation are entirely transitory. The last in order of appearance, even if he is not on the board, is the former president of the ECB, Jean-Claude Trichet, who told Bloomberg yesterday that the eurozone is in a very different situation compared to the US, which instead they have already announced their intention to reduce purchases (while not specifying the exact starting date). Trichet pointed out that ECB purchases enjoy greater flexibility than the Fed's schedule.

Signs of nervousness also come from the rest of Germany. A study by the prestigious research center ZEW quite explicitly accuses the members of the ECB council and the governors of national central banks from countries with a high debt / GDP ratio of pushing towards the continuation of Quantitative Easing for a long time to come. Thus perpetuating the “fiscal dominance” constituted by the debt and securities issuance choices of some countries (Italy in the lead) that are cradled by the buffer formed by the purchases in Frankfurt. The commentator of the Daily Telegraph , Ambrose Evans-Pritchard, immediately resumed the German study, explicitly speaking of the danger facing the public debt quotations of the "countries of the south" (including France, and it is neither a surprise nor a coincidence) when the ECB slowed down purchases. The markets would react with a very dangerous rate hike for debt sustainability and would expose all the structural flaws of the eurozone: the absence of a true fiscal transfer union and a banking union.

These comments also put the latest events on the Italian front in a new light:

  1. Cash and cash equivalents of the Treasury at the Bank of Italy which as of August 31st reached the record figure of 139 billion. This is also thanks to the collection of 25 billion of the advance from the Recovery Fund which took place before August 15th. Absurdly, the state could avoid making net issues of public securities and finance the requirement for many more months by drawing from the cash.
  2. On Tuesday, Reuters announced, citing confidential sources close to the Treasury, that the deficit / GDP for 2021 (initially forecast at 11.8%) is expected to fall significantly below 10%. All this as a result of higher GDP growth (which should be close to 6%) and a better trend in public borrowing (there was less draft than expected for some items of expenditure).
  3. The good data relating to the trend of tax revenues (+ 11.5%, in the period June-July compared to the corresponding period of the previous year).
  4. The good trend of the state budget requirement: after the positive balance of 5 billion in July, a surplus of 9.1 billion was also recorded in August, bringing the requirement from January to 70 billion (against 106 in the same period of 2020) .

In Rome they are preparing to put sandbags to protect the trenches, because in any case nothing good is expected for us: either Germany continues to accept an accommodative monetary policy from the ECB, while imposing a very high price on the Italy, in terms of budgetary discipline and reforms; or the ECB begins to pull the oars in the boat with the purchases, unleashing the perfect storm on the market of public securities and imposing the rescue of the ESM on us.

It remains to be seen how President Mario Draghi will be able to counter these scenarios. Unless he has been called to fill that role precisely to make them possible without great internal opposition …

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/la-bce-i-conti-di-draghi-e-il-rischio-mattane-della-germania/ on Thu, 09 Sep 2021 04:00:20 +0000.