Confirming our speculation from yesterday, that unlike 2012 when Draghi unleashed the infamous “whatever it takes”, this time the ECB, already saddled with trillions in public and private debt and under a political interference spotlight, will have a much harder time intervening in the market, moments ago Reuters reported that the ECB sees no need to intervene in the Italian crisis, as Italy’s borrowing costs were still less than half those seen during the 2010-12 euro zone debt crisis, it sees sees no stress in bank deposits, inbterbank rates or cash auctions, and would not act “on the back of events of just a few days” even as the central bank is keeping a watchful eye on Italy.
To be sure, market speculation that the ECB would be forced to end its QE taper or, worse, intervene imminently has been mounting over the past week as political parties in Italy failed to form a government due to unprecedented intervention by Italy’s president Mattarella, and the notion of a euro exit began to swirl, sending borrowing costs for the euro zone’s largest debtor soaring.
More concerning is what Reuters sources added:
- ECB DOES NOT HAVE THE TOOLS OR MANDATE TO SOLVE WHAT IS A POLITICAL CRISIS IN ITALY: SOURCES
In other words, Italy is stuck with whatever means the ECB has at its disposal currently. These include Italian banks getting paid the same, deeply negative interest rate – in other words, getting paid – to borrow from their peers against collateral, now the most common form of lending between banks.
Helpfully, auctions of ECB cash also showed no sign of a pent-up in demand from banks. This was largely due to the massive ECB purchases of government bonds and its ultra-low interest rates – the two main planks of a stimulus programme that is expected to be gradually wound down in the coming months despite the Italian crisis.
“We’re not yet at a stage when you have to start worrying about bank deposits and I hope we’ll never get there,” another source said.
While some have taken this as good news, i.e. that Draghi does not see the Italian crisis as sufficiently big to merit an ECB intervention, others have cautioned not to overestimate the bank’s flexibility to react should the Italian turmoil return. This, as more than one trading desk, is the weakest link in the market’s sequence of events, as traders still expect the ECB will do “whatever it takes” to curb more contagion, which is why the risk is that contagion does indeed pick up, especially if Friday’s vote of no confidence in the Rajoy government, passes and leads to another European risk locus.
Meanwhile, one fund which is not catching falling knives, is also the world’s biggest bond fund, Pimco, whose chief investment officer of global fixed income macro, Andrew Balls, said that Italian bonds currently don’t offer sufficient compensation for the risk — although not high — of the nation exiting the euro.
“We’re not forecasting an exit but you do not need a high risk of this to happen to want higher risk compensation,” he told reporters at a briefing in London, adding that Italy could effectively exit the bloc – without actually leaving it – by losing access to the institutions of the euro zone.
For now, however, the market is breathing a sigh of relied with 2Y Italian yields down 100 bps from Tuesday’s closing print, at roughly 1.72%.
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