What will happen to the Italian public debt. Bloomberg’s 3 scenarios

12 January 20222 years ago babelfish

It will be the mammoth Italian public debt that will mark the fate of the common currency experiment, according to Bloomberg. Here because. The article by Giuseppe Liturri

“For better or for worse, the future of the euro will probably be decided this year”.

Thus begins a long and detailed editorial appeared yesterday on Bloomberg signed by Richard Cookson, authoritative columnist of this newspaper with extensive experience in the management of investment funds and knowledge of financial markets.

It will be precisely the mammoth Italian public debt that will mark the fate of the experiment of the common currency, thus the summary of the article.

After two years that the ECB has " anesthetized " the government bond market with the massive purchases of the PEPP and PSPP programs, worrying about sterilizing any tension around Italian bonds, today the scenario has changed.

The rise in inflation, despite Christine Lagarde's constant assurances, is now destined to lose the connotation of transience, to become permanent, due to the ecological transition and the associated increase in the cost of energy.

As a result, purchase programs will suffer a sharp decline, which has already been announced, and rates could increase as early as the end of 2022. The TLTRO program (loans on particularly advantageous terms to commercial banks by the central bank) will also come to an end. .

Faced with these now inevitable choices, Italy will be " the greatest cause for concern " and it will soon be clear to the whole market that the risks must find an adequate return and the spread will widen again, perhaps dramatically.

"The crisis will probably be inevitable " and three possible scenarios are opening up for our country to solve the difficulties that our public debt securities no longer supported by the purchases of the ECB will invest:

Restructuring of public debt, with losses imposed on creditors who, let us remember, are mainly national (banks, insurance companies, etc …)
The exit from the euro, with losses inflicted on the other creditor central banks (Bundesbank in the lead) of the Bank of Italy under the Target 2 system. An option that would make Brexit seem like child's play.
The transfer of part of the Italian public debt to a debt management agency (ie the Mes), a solution implicitly endorsed by Mario Draghi and Emanuel Macron in their recent intervention in the Financial Times and commented on here ). A sort of mutualization of the debt that would see Germany and the other countries "furiously" against, which had to make important sacrifices to enter the euro, cutting the debt.

Yet a compromise to ensure the survival of the euro will have to be found. but this will only happen when the risk of rupture is sufficiently serious in the eyes of the creditor countries. And this break should also include Italy's threat of exiting the euro.

So far, Cookson's reasoning that effectively lays bare the dry alternative that the ECB will have to face in the coming months: it will have to worry about the stability of the Italian government bond market, while tying hands with respect to the need to maneuver on rates and to reduce its balance sheet, or will it have to listen to German creditors who, with inflation of around 5% or more, can no longer tolerate nominal rates around zero and therefore largely negative real rates?

Will the structural defect of the eurozone, which claims to have a single monetary policy for such different areas, lead to its implosion?

We do not feel like formulating assessments or forecasts on the outcome of the tug-of-war within the ECB, which will have obvious repercussions also at the political level; we only allow ourselves to observe that the clues in favor of the solution that would see us trapped in the " death row" of the Mes, which would even be presented to us as a compromise solution, almost a kind concession from our partners Europeans.

Not surprisingly, a few days ago it was presented in this way in the columns of the Corriere della Sera. And two clues begin to look like proof.

Estote wallpaper.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/debito-pubblico-italia-scenari-bloomberg/ on Wed, 12 Jan 2022 06:48:09 +0000.