Ben Chu: Victory for Rome? Sorry, Monti, you're still €1.9trn behind…
Could this deal be the prelude to directing the full firepower of the ECB at the debt crisis?
Did Italy beat Germany twice in the space of a few hours – first on the football pitch and then in the conference room? The Italian Prime Minister, Mario Monti, suggested so yesterday.
"It is a double satisfaction for Italy," he purred in Brussels, as reports circulated that he had twisted the arm of Angela Merkel, until the German Chancellor said yes to his plan to allow the European bailout funds to buy up Italian bonds.
Yet however glorious Italy's footballing victory over their northern rivals this week, the bond-buying démarche could well crumble into ashes. The purpose of using the common bailout funds to snap up Italian and Spanish sovereign bonds is simple: to drive down the interest rate, or yield, on those bonds, which is threatening to push the two nations into bankruptcy.
The problem is that the bailout funds have only around €500bn (£300bn) left in them. That might sound a lot, but in the context of an Italian sovereign borrowing pile of €1.9 trillion it's a mismatch as glaring as the England midfield against the Italian maestro Andrea Pirlo.
If the two pots – the European Financial Stability Facility and the European Stability Mechanism – did move into the Italian and Spanish sovereign debt markets in the coming weeks, investors could seize on it as an opportunity to offload as many of those bonds as possible before the resources were exhausted. As Holger Schmieding, of Berenberg Bank, said yesterday: "Stepping in with limited resources is an invitation to markets to speculate against them. Letting the [bailout funds] buy Spanish or Italian bonds could backfire badly". What he means is that the pots could be empty by the end of the year, and yet Italy would still be stranded on the verge of bankruptcy because nothing would have fundamentally changed in investor sentiment about Italy's future in the single currency.
There is, however, a glimmer of hope, which suggests Mr Monti might be gambling on an extra-time winner. Europe's leaders also agreed that the European Central Bank will serve as an "agent" for the bailout funds, which means that the Frankfurt-based lender of last resort will do the buying in the debt markets on their behalf. Many analysts and investors argue that a necessary condition of ending this crisis is getting the ECB fully involved in these debt markets, not just as an agent, but as a buyer in its own right. And not just buying a few bonds here and there – as the ECB did last summer when it stockpiled Italian and Spanish bonds for a few months – but full-blooded quantitative easing of the sort the Bank of England and America's Federal Reserve have engaged in.
So could this Brussels deal be a prelude to deploying the full firepower of the European Central Bank, at last, in the eurozone sovereign debt crisis? That alone wouldn't be the end of the crisis, but the Italians – and all those who want the eurozone to survive – would cheer it to the stadium roof.
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