Italy warns of autumn funding crisis as EU summit claims unravel
Mr Codogno said foreign funds remain wary of Italian bonds at current compressed yields. The attempt to tap retail investors has “effectively failed”. The first issue of patriotic bonds worth €22bn went well in March, but the second issue of BTP Futura bonds in July netted just €6bn.
The European Central Bank is soaking up Italian debt under its “pandemic QE” programme, deviating a long way from Italy’s share of eurozone GDP. But there are political, legal and technical limits to this fiscal absorption.
Unlike the Bank of England, the ECB is not allowed to buy bonds directly in the primary market. It is restricted to securities already trading in the secondary market. “The Italian treasury must find a way to place the debt in the first place,” said Mr Codogno.
The ECB is navigating a treacherous course after the explosive judgement by Germany’s top court in May, which ruled that the central bank exceeded its mandate during earlier bond purchases and strayed into quasi-fiscal support for insolvent governments. Credits from the Bundesbank through the ECB’s Target2 payments nexus – mostly to the Bank of Italy – are likely to blow through €1 trillion in July and set off a media storm in Germany.
Christine Lagarde, the ECB’s president, has signaled that the bank will step up pandemic QE if necessary. But the institution’s body language does not match the rhetoric.
Hedge funds are honing in on the apparent insouciance of the ECB over deflation dangers. They have noted its schedule for rapid quantitative tightening (reverse QE) as soon as the immediate crisis is over, as well as the hawkish tone of Germany’s board member, Isabel Schnabel. “What it all tells you is that the governing council is divided. There is going to be a big day of reckoning over this,” said one fund manager.
Five Star’s adamant resistance to an ESM loan are in one sense absurd. The normal EU conditions for loan from this bail-out fund are being waved on this occasion because of the pandemic.
