ECB Reacts (Unofficially) to NIRP’s Revenge in Italy

Bond turmoil, no problem. But if Italy doesn’t stick to the rules, the ECB might let the bonds go, “safeguard the remaining Eurozone members,” and “merely control the disaster.”

After dizzying plunges in the Italian government bond market on Monday and Tuesday, the ECB wasted no time communicating through unofficial channels: It’s not stepping in for now, it’s keeping an eye on the Italian bonds, but they haven’t really plunged all that much yet, and yields aren’t really that high, and there are no signs of stress in lending between Italian banks, and deposits are stable, and this isn’t yet a big deal that would require ECB action.

They also said that the ECB had neither the tools nor a mandate to solve what it considers primarily a political crisis in Italy.

These envoys were “sources close to that matter,” later described as “three officials,” who talked to Reuters.

And this is what they were reacting to: The two-year Italian government bond yield had skyrocketed from near-zero to 2.8%, most of it on Monday and Tuesday. And today it fell back to 1.73%. This is an hourly chart of the past four days of bond turmoil:

The sources said that Italian government bond yields, reflecting the government’s borrowing costs, were still less than half of their peaks during the debt crisis in 2011.

Today the Italian government’s debt office sold €1.8 billion of 10-year notes at a yield of 3.0%. So the cost of borrowing for the government has jumped from 1.7% at the last 10-year auction, but is still way lower than the 7.56% it paid in November 2011, during the peak of the Eurozone debt crisis. And it’s just a little above what the US government currently would have to pay.

Also today, the debt office sold €1.7 billion in five-year notes at a yield of 2.325%. This is the most since 2013, but still low. And lower than what the US government would have to pay (2.66% currently).

Yesterday – on the worst day for Italian bonds in Eurozone history – the government sold €5.5 billion of six-month bills at an average yield of 1.21%. While that’s up from negative yields in prior auctions, where investors absurdly agreed to pay the government for the privilege of lending it money, the yield is still massively below the US six-month yield of 2.06%.

And yields for maturities of three months and shorter are still negative. So the government has no trouble borrowing in this environment; it just has to pay a little more, an indication that the ECB’s negative interest rate policy (NIRP) is beginning to phase out for Italy.

This is why the three envoys from the ECB told Reuters that the funding costs were still less than half of the costs during the debt crisis, that bank deposits were stable, and that there were no signs of stress in the interbank-lending market.

“No central bank would act on the back of the events of a few days,” one source told Reuters.

“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 told Reuters.

This is not to say the ECB would never step in and aid Italy. In an interview with the Spiegel, published on May 29, outgoing ECB Vice President Vítor Constâncio, when asked if the ECB would intervene again as it had done in 2012, replied: yes, but there would be conditions – namely an “adjustment program” or commonly called austerity:

“I would like to stress that every intervention has to contribute to the fulfilment of our mandate and is also subject to conditionality. The Outright Monetary Transactions program for intervening in national sovereign bond markets of vulnerable countries can only be used if the country in question also agrees to an adjustment program. The rules are very clear on this. Everyone should remember that.”

Spiegel: “So if Italy wants to circumvent the EU’s fiscal rules, it can’t necessarily count on the ECB’s help?”

Constâncio: “I will only say that Italy knows the rules. They should perhaps take another close look at them.”

But these rules are anathema to the two anti-establishment parties – the Five-Star Movement and the League which have been trying unsuccessfully so far to form a coalition government. The League has said that if its plan to lower taxes and raise spending (the opposite of austerity) isn’t acceptable to the EU, it sees Italy’s exit from the euro as a contingency plan. Hence, an “adjustment program,” imposed on Italy in return for an ECB bailout, is not likely to happen if the coalition succeeds in forming a government.

Then the ECB might just let Italy’s bonds go their own way and focus on preventing financial contagion in the remaining Eurozone member states, according to one of the sources who told Reuters: “The ECB could safeguard the remaining Eurozone members but it would be merely controlling the disaster.”

And in that case, bondholders – mostly institutions – that hold Italian government debt would be left to negotiate with the Italian government on their own.

But that’s not the case for now. And the bond market is not seriously speculating on this possibility either. It’s simply normalizing yields, but doing so very swiftly, rather than gradually.

Markets wailed and gnashed their teeth on Monday and Tuesday as normalization of Italian yields set in. Read…  NIRP’s Revenge: Italian Bonds Plunge, Worst Day in Decades

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  43 comments for “ECB Reacts (Unofficially) to NIRP’s Revenge in Italy

  1. BenX says:

    Isn’t the Italian bond market reacting to the increasing possibility of an Italy exit from the EZ (sorry – there’s no fun portmanteau for Italy) – and talk of a new lira (aka “Plan B”)?

    • LessonIsNeverTry says:

      Quitaly is the one you want ;)

    • Wolf Richter says:

      If the bond market thought that Italy would leave the euro, the 10-year yield would be 20% or higher, right there with near-default junk bonds, because Italy would default on those bonds shortly after it gets a new currency, and that risk would be priced in.

      Now the 10-year yield is 3%. Similar to the US. As far as the market is concerned, no upheaval whatsoever is priced in.

  2. Petunia says:

    If you need evidence that global finance is totally politicized, here it is. WS doesn’t like political discussions and I have always argued that politics and finance are one and the same, since the GFC more than ever. Here is evidence that if they don’t like the way the peons vote, they punish them with economic repression. Where have I seen this before?

    • Ambrose Bierce says:

      The coalition has a majority, they were going to impeach Mattarella. The markets are up today but the crisis is not over, and the populists seem to have the upper hand, which implies more trouble for bonds ahead. The US isn’t that far from this sort of crisis the volatility in rates (due to the rate hike of bust policy, and the markets blowback for the pause) this is unprecedented, and has the effect of paralyzing the buyers and sellers of these securities.

    • Rates says:

      Politics, finance, and economics are obviously related.

      Economics is about what i.e. the resources to be allocated.
      Politics is about who i.e. who’s gonna get those resources.
      Finance is about how i.e. how would those resources get paid for.

      It’s funny. I was literally in Italy about a week ago for 5 days. Most people in the streets didn’t even know about this “crisis”, which is expected. They were too busy serving American tourists. Man I simply don’t get the brouhaha about the amount of Chinese tourists in Europe. In Barcelona, I would estimate Americans made up 50%+ of the tourists there. Same with Italy.

      • Kent says:

        I’m in Amalfi right now. I’d say it is at least 75% American tourists. Anther 10% are Brits and the rest are Asian and Russian. Nobody seems concerned about the bond situation, but these are working class folks.

        • Rates says:

          Hei nice, I was in the Amalfi coast last week too. Totally awesome. Italy is the most beautiful country in Europe in my opinion. There were tons of Canadians as well.

          But yeah, Murica is already great again.

        • BillS says:

          Amalfi is not exactly representative of Italy. It’s an overpriced tourist trap that may as be reproduced in Las Vegas or Disneyland. Want to see real Italy in all its beauty and ugliness? Go to nearby Naples or perhaps the depopulated regions in the deep Mezzogiorno, like Basilicata, Puglia or Calabria. Even in many “prosperous” northern zones like the concrete-paved provinces of Treviso or Vicenza have their share of emptied-out industrial areas among the vineyards and fields.

        • Rates says:

          BillS, I was in Naples for a couple of days. Amalfi was just a day trip. Every country has its non nice cities, etc and saying Naples is representative is also not true. A lot of the bigger cities i.e. Rome, Florence, etc are quite nice. I have literally walked all over Rome over multiple trips and it’s always been a pleasure. Same with Florence.

          Even old Murica has its dying fly over country, etc. Should we say then that they are representative?

        • BillS says:

          I think Kent makes my point nicely when he describes Amalfi being 75% American tourists. No, that is not “representative” of the country at large. None of the tourist areas are (in any country). Their economies are dominated by the tourist trade which amounts to 10.2% of GDP in Italy as a whole (2015 figures, source ENIT A good chunk, but hardly the GDP generated by the industrial regions of Veneto, Lombardia, Piemonte, Emilia-Romagna. Hence, in an economic sense, Treviso is far more “representative” of Italy than Rome or Florence (and the Trevisani will remind you of it constantly as well! ;-) )

          Moreover, I never said that there was no beauty to be found in the depressed areas. The stunning lunar landscape of Basilicata (not to mention the town of Matera) left me “a bocca aperta”!

      • Mark says:

        The study of economics used to be called “political economics” for a reason. As a scientist, I certainly appreciate the comedy value of economists attempting to persuade people that their field is a science but it repeating something in an endeavour to make it true is also politics, not science!

    • Maximus Minimus says:

      Politics and economics are certainly linked, and I don’t mean sanctions. If a US entity wants to sue a forein government, e.g. a left leaning Argentinian one, it needs a go ahead from the state department. It would have tough luck suing the UK government.

    • Cynic says:

      Quite right, Petunia. It’s never been so openly expressed:

      No ‘populism’ (Left or Right).

      Votes for the status quo are the only ones acceptable.

      Expressing reservations about the Eurozone or unrestricted freedom of movement and mass immigration into Europe is not permissible.

      This reduces the citizens of Europe to the status of peasants in cottages tied to their work, who dare not criticise their landlord, and must vote for his candidate in the elections, or else……

      The European Ideal as sold to the masses is now well and truly dead.

      But they will try to keep the corpse looking fresh, like Lenin’s.

    • Smingles says:

      I find it ironic that threats like these usually have the opposite effect, i.e. will potentially cause MORE people to migrate towards populists.

      I mean, they’re basically making the populists’ argument for them… the EU is anti-democratic. I’m not saying that’s true or not, but these bureaucrats are utterly inept at this game. Machiavelli would be ashamed.

  3. Kasadour says:

    This system of debt-finance of day to day operations (of govt) is dependent upon the smooth and stable operation of any given govt. in a calm political and social environment.

    we’ve already witnessed how quickly things can get out of control (in one day), and banks take huge losses with every basis pt rise when political stability is even questioned or threatened.

    I personally don’t see how normalization is considered normal at all when you have absurd statements like ”Italian 2-yr bond bursts out above 2%” – think about that statement for a moment.

    If the political and social climate continue to languish in Italy, and it’s almost certain that it will, the worrying stage has probably passed them by already and the panic stage will descend on them suddenly- in one day. Apparently, that day is not today, but it could be any coming day.

    • Mean Chicken says:

      If not today then most likely tomorrow unless the concern is overblown and that never happens.

      • Kasadour says:

        When it becomes obvious that the concern is overblown, then the day arrives. Nothing ever happens with expectations in mind.

        I think I just contradicted myself. /-:

    • Petunia says:

      The Italian banks were already under capitalized, as we know from reading DQ, this rate shock is surely not going to help that situation, and will eat up more of their capital. Taking this to its logical conclusion, they took depositor money through NIRP and ZIRP, and they are going to need more capital, you can almost smell the bail-in coming.

      • d says:

        Trouble coming yes, bail out, not before big bail IN.

        Especially if there is even the slightest hostility or objection to instructions from brussels, which in this situation, you can guarantee there will be.

  4. Trinacria says:

    Italian president Mattarella – an EU puppet – call for new elections in July will hopefully strengthen the center-right movement and therefore blow up in his and the EU’s face. How can the EU even exist when Italy itself can easily be 3 or even 4 countries? The customs and cultural differences are too strong – I know first hand as I’ve lived in different parts of Italy in the past as I have family throughout this beautiful country. You can’t force Italians – especially southern Italians to act like Germans. The EU could bully Greece, but Italy is not Greece. There is going to be some serious pain down the proverbial road. I feel for my Italians relatives. Boy, Dante was sure correct in the 13th century when he alluded in his epic work (The Divine Comedy) that bankers and politician types belong in the lowest rung of hell.

  5. d says:

    1.75 % MEH.

    Until you consider, that this is an increase of over 900% in 2 days.

    As to the rest of the article, simply put the ECB “Support italy first policy” could be at an end, an action that is long overdue. Prompted by none other than italian anti Eu and Eu regulation forces.

  6. Payne says:

    The bankers worst nightmare ….. democracy.

    And they will do anything to crush it.

  7. Leser says:

    It’s an interesting stand-off: the EU establishment thinks they can force the populists into submission by rattling voters with worrying market “reactions” as seen with Greece; on the other side Lega and M5S have everything going for them at the moment: voter fears allayed that the seeming polar opposites on the populist spectrum will not be and not be up to the task and disintegrate in squabble, they are in power now yet can still paint themselves as opposition, and Oettinger’s revealing comment at the best possible moment.

    Lega could thus speculate to gain from encouraged Forza voters, on the other hand Berlusconi still owns the Italian media and will surely find an angle, particularly now that he’s rehabilitated.

    Almost bizarre to see Cottarelli then put forward as potential PM – a mini-Draghi and the very last person to crystallise a compromise. Perhaps it’s a sign of the establishment’s lost sense of reality, or of Cottarelli’s ambition (after famously regretting years ago that he would “never” be prime minister). In any case, a kind soul took pity on him it seems and told him he was being set up – so he withdrew with an excuse immediately.

    Certainly many people with a hope for change in Europe wish to see this “crisis” become the catalyst. Whether the Italians – weary, disappointed and exhausted – will choose to pick this fight, I’m not so sure.

  8. Maximus Minimus says:

    While it might not be immediately available who the current buyers are, who was buying Italian gov. bonds more recently?

  9. WSKJ says:

    ItsCiao ?? No, no, that’s not nearly good enough. However, someone on Wolfstreet will likely come up with a clever portmanteau, BenX.

    The question seems to be, how much of a jolt, how big a devastation, will it take to clarify to central bankers that they must cease and desist from the use of ZIRPs and NIRPs in attempts to steer economies through rough times ? ZIRPs and NIRPs suggest to populations that their money is rather worthless, and that’s not a message that the central banks want to broadcast, is it ?

  10. WSKJ says:

    Ciaotalia ?? No, but come on, wordsmiths, the right term is waiting for your aha moment.

    Sorry, Wolf; I will cease and desist now.

    • Tom in DE says:

      Somewhere online I’ve read “Italeave”.

    • Kasadour says:


      • Trinacria says:

        Best one I’ve heard is “Quitaly”….the other ones just don’t do it in my opinion.

    • Justme says:

      ArriviDeutsche ? (Farewell, Germans) (from Arrividerci)

    • Michael Gorback says:

      The Italian verb for exit is uscire (pronounced oo- shee- ray ) so I vote for Uscitaly (prounced oo-shit-alee). I’d love to watch the talking heads say Uscitaly on TV with a straight face.

  11. raxadian says:

    Yet Italian banks are still dropping dead like flies.

    Nothing to see here guys, move along.

  12. Aw Yeah says:

    Is NIRP as stupid as it seems? Surely no private or institutional investor would buy a negative yielding bond. I mean, if the ECB is the only one buying government bonds with negative interest then it is free money for them, right? Or am I missing something?

    • Wolf Richter says:

      Many institutional investors are “forced” buyers, such as pension funds, life insurance companies (part of the private sector retirement system in much of Europe) etc. They have to invest a certain amount of their funds in certain euro bonds with certain maturities.

  13. Realist says:

    Well, Italy’s problems have roots that go back long before the Euro and the day is coming nearer when the chickens will be coming home to roost. The introduction of the Euro did change the game in such a way that the Italians can’t any longer paper over the decay of the Italian system the way they did before.

    The political system in Italy has not been stable since WW2, no other western country has had as many governments as Italy and this instability in turn has not directly encouraged economic policies taking a long time view and at the same time stiffling the economy. To be frank the job as prime Minister of Italy is probably one of the least enviable ones around, maybe being Finance Minister of Italy is the only position beating being Italian PM.

    Austerity is something that never has existed in Italy due to the weak political system. The closest the Italians come to austerity is short periods when the government has tried to run a sensible economic policy that have nothing in common with austerity.

    The Italians should take after the Finns. The Finns have always included their populists into the ruling coalitions, thus neutering them. Being the member of government tend to force the populists to face up to reality and deal with it, thus creating havoc for the populists’ popular support.

    An excellent example is the fate of the True Finns. Their being part of the ruling coalition has ended up in the True Finns splitting into 2, sniping at each others, one part still in the ruling coalition, the other part playing opposition…

    • BillS says:

      You are quite right. Italy after unification was never easy to govern. Unification under a federal system instead of its centralized unitary model may have been more successful for governing the patchwork diverse regions that make up Italy. I like to say there is not one Italy, but 20 (each of the regions). Each region has its own cultures, dialects, economies and history and, up to unification, were more likely to fight with each other than to feel any love for “Italy.” Italy was basically built by northern industrialists and liberals, at the expense of the feudal south. Garibaldi famously retired in disgust at what he saw the newly unified state becoming.

      The young Italian state was more interested in acting on the stage of “great powers” (in generally unprofitable wars and intrigues from 1860 to 1945) than in building a modern state and economy. After WWII, the economic boom began with Marshall aid and the USA and allies were active in destabilizing the Italian government in its goal to exclude the powerful Italian Communist Party from government and maintaining the hegemony of the corrupt Christian Democratic Party (culminating in the murder of Aldo Moro and the terrorism of the “Anni di Piombo”).

      Unfortunately, this legacy lives on in the corruption, organized crime and ineffectiveness of the Italian political process. Italians have always retreated to family, work and local communities as an escape from bad government. Now these institutions of refuge are disintegrating as well and Italian citizens are understandably angry and discouraged because they feel have nowhere to turn.

      • Michael Gorback says:

        Excellent analysis BillS. I go Italy about every six months and that’s about the most succinct summary I’ve seen. Prior to unification if you traveled 20 miles you might not be able to speak the local dialect.

        After centuries of armies rampaging up and down the peninsula Italians have learned to live around the chronic dysfunctional situation. I have never seen any group of people so happy as a table full of Italians having dinner. They have a subsystem that they live in that helps insulate them from the incompetent corrupt government. Italian loyalties (in order of importance): family, friends, neighborhood, town, soccer team, province, and a really weak trailer is Italy. Economically, North and South are kind of like the American North and South before the civil war – industrial vs agrarian.

        I was once talking to the owner of a new hotel in Sperlonga. He was furious about the red tape and taxes that strangle new business startups. He told me that Italy needed a revolution like we had in the US. I told him we needed another one too.

  14. Paul Morphy says:

    Italy cannot afford to stay in the Euro.
    Italy probably could not survive outside of the Euro.
    Italy is in the worst of both worlds.

    Italy has €2.8 trillion of national indebtedness. I suspect that corporate debt and bank debt don’t look too healthy either. A huge portion of all of this debt is tied to bonds and therefore bond yields. If yields begin to increase then all of that debt becomes far more expensive.

    The backstops created by the ECB to tackle the crises in Ireland, Portugal, Spain, Cyprus and Greece may be insufficient to address the Italian debt problem.

    • d says:

      What will hit Italy, is that as yields rise, and older bonds drop in value, combined with more capital flight, many of the banks with high NPl ratios, and large State bond holdings, are going to hit capital ratio trouble.

      Which will lead to a cycle of bail in, and more capital flight. Among more small banks.

      Effectively a doom loop among the small banks, which italy has many off.

      Its long overdue and italy has been staving off dealing with the NPL issues in small banks, for to long.

      Unless italy is very careful the ECB will be bailing them in every week for some time to come. As when the money flees, the majority of it will not flee to another Italian banks.

      Currency moment and cash withdrawal controls in italy, will simply move the money under mattresses.italians will pay with cards and dra cash, every day if need be.

      Nobody tried to force the greeks to bring the Eur in other states back to greece and i do not see them trying to do that in Italy or Spain.

      Why are so many, italian, spanish, and Portuguese Banks, in this horrible under capitalised, NPL, situation, still.

      Simple, they all had to much exposure to greece and they have never recovered from the haircuts as small investors they were required to take, on their greek bonds.

      Many of them should have been wound up back then, but the club-med CB’s, and the ECB, kicked the can, and they have been doing so ever since.

      The new IMF served Italian PM, has more brains than the president, me thinks.

      As he has the populist talking of forming a Govt again. As he knows, if it goes to elections soon, all bets on italy, are off.

      If the populist can not be placated, elections, is what will happen. The out come of that. With berlusconi legally back in the mix????

  15. Cynic says:

    My theory is that, in Brussels, they save Machiavellian genius for their internal power struggles, and the citizens are viewed merely as flies, to be flicked off their nice suits.

    Hence the ineptitude of many of their public statements, warnings, etc.

  16. GSH says:

    Elections in Europe are now purely for mass entertainment. If the voters choose the correct EU friendly government, it is business as usual. If they attempt to put Euro skeptics in charge, the election results get annulled (Italy), ignored (Germany/Merkel) or the new leaders are forced to turn on the electorate (see Tsipras). The EU now has defacto political integration not just an economical one. This has been the obvious next step. Nobody is leaving the Euro zone.

    • Trinacria says:

      The breakup of the EU is only a question of when, not if. But I must give the criminals in charge lots of credit for keeping the charade going much longer than I would have ever thought possible. It is hard to know what exactly will be the trigger. We know the debt path is completely unsustainable and, is at levels that cannot be paid back. We will just wait and see. The day will be unfortunately very ugly as contrived things usually are…

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