Brexit Redux: ECB Ready To Buy More Italian Bonds If Referendum "Rocks Markets"

Tyler Durden's picture

In a report confirming that the ECB is preparing for a rerun of a post-Brexit scenario, Reuters writes that the ECB is ready to temporarily step up purchases of Italian government bonds if the result of next Sunday's crucial referendum, which according to WSJ will likely determine the future of not only Monte Paschi but other insolvent Italian banks, "rocks markets" and sharply drives up borrowing costs for the euro zone's largest debtor.

As observed here over the past week, Italian government bonds and bank shares have sold off steeply ahead of the Dec. 4 referendum on constitutional reforms as the market has grown to appreciate the risk of political turmoil. Opinion polls suggest the 'No' camp is heading for substantial victory, which could force out Prime Minister Matteo Renzi in the latest upheaval against the ruling establishment sweeping the developed world. Heavily indebted Italy's borrowing costs are closely watched as a potential flashpoint for market instability in the wider euro zone.

Just like in the hours after the Brexit announcement, when the ECB and other regional central banks vowed to step in and stabilize markets, the ECB will likely use its €80 billion monthly bond-buying program - which already hold nearly €1.2 trillion in European bonds - to counter any immediate, further spike in bond yields after the vote, smoothing market moves and supporting bonds, according to four euro zone central bank sources who asked not to be named.

The sources added the scheme was flexible enough to allow for a temporary increase in Italian purchases and that such a move would not necessarily need to be rubber-stamped by the ECB's Governing Council, which is due to meet on Dec. 8 to decide on whether to keep buying bonds after March.


But they stressed this would be limited to days or weeks, to counter any immediate market volatility, because the asset-purchase program was designed to shore up inflation and economic growth in the entire euro zone and was not intended to fight crises in individual countries.


This means that, if Italy or its banks needed longer-term financial support, Rome would need to formally ask for help.


"The Governing Council understands that there is some space to help Italy, which will be used, if needed. The asset purchase program has built-in flexibility," said one of the sources. "The key is that the ECB has to be convinced the volatility can be overcome by using this flexibility."

Last week ECB Vice President Vitor Constancio opened the door to a central bank intervention last week but also stressed that still-low Italian bond yields did not point to investor fears that the country may crash out of the euro zone. Indeed, concerns about deposit flight and the health of Italian banks, rather than Italy's own borrowing costs, have become Rome's biggest worry in the aftermath of a 'No' vote.

Italy's 10-year bond yields stand at 2% the highest level in more than a year but nowhere near the 7% level that prompted emergency ECB purchases in 2010-11 and eventually led to the resignation of Prime Minister Silvio Berlusconi, when Draghi refused to intervene in capital markets in a show of force with the then-Italian PM to demonstrate who is the real boss.

Reuters also adds that Euro zone central bank sources say there is little the ECB can do about the banks' need for capital unless Italy itself asks for a rescue program for its banking sector. This would also unlock further, country-specific ECB purchases of Italian debt, known as Outright Monetary Transactions (OMT). These, unlike the current asset-purchase program, are not tied to the "capital key", or how much capital each country has paid into the central bank.

"There is a risk that a bout of volatility would have a broader impact on the bank sector," one of the sources said. "At that point, it's not for the ECB to act. That's typically where OMT needs to come in with all the requirements, including a (rescue) program."

Logistic aside, BTP futures briefly spiked higher, gaining ~30 ticks in 2 minutes, to session high of 135.46, after Reuters cites unidentified sources to report ECB ready to temporarily step up Italy bond purchases if referendum causes yield spike.

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Haus-Targaryen's picture

The ECB is ready to create a bunch of ones and zeros on some computer screen somewhere to purchase Italian bonds (create artificial demand where there is none) so as to put pressure on sovereign debt speculators as well as allow the Italian Treasury to see the next day.  

This is not real economics.  This will end horribly. 

For everyone's sake I hope sooner rather than later. 

Cognitive Dissonance's picture

The Twilight Zone has nothing on the world's present day alternative reality.

And I suspect we ain't seen nuttin' yet.

SomethingSomethingDarkSide's picture

Only if you have to buy food, pay rent, may need health care, or desire an education.

Other than that, things are looking swell.

Ghordius's picture

"This is not real economics"

by that, I presume, you mean those are not free markets, in the sense of free from governmental intervention

don't forget, though, that government is already involved. it is government paper, gov IOUs with deadlines etc. that are those markets

if it was beer cans... well, you would find it normal that the beer brewery is free to set the price it wants, and the customers to buy or not

here, it's national govs that "produce" the "product" called Sovereign Bond. and yes, their price is of... national interest

now, explain to me how "speculation improves stability by supplying liquidity". I love that tale, full of wonderful twists and drama

debtor of last resort's picture

I have never met a brewery with a printing press.

Ghordius's picture

true. but beer is food. Germans call it "liquid bread"

now go on and explain to me how you are hurt by the printing press behind Italy's sovereign bonds market

you don't drink or eat bonds, do you? your nick is "debtor of last resort", but it is not your debt, either

how does this compare to when the international wheat prices were subject to speculation? now, there we had food riots, didn't we? and the destabilization of a dozen countries

you want markets... because, just because. and not including consequences. well, this one has a printing press behind it. live with it

the question here ought to be more why wheat has none behind it. but there you have it: it could be even more disastrous, in the long term. unless you look at the subsidies behind it, and there, again: markets? what markets?

sorry, there was never a simple, perfect market. that stuff belongs to the mythical books of "economists"... peddling some simple tale

Haus-Targaryen's picture

How does it hurt me Ghordo? 

It makes a risky asset very expensive with artificial demand hurting savers who were willing to take a moderate risk for a moderate capital return. Now if they want to invest they have to take ever smaller returns for ever larger risks. 

Sorry, but in this case your egregious EUR love-affair is sickening.  

Draghi has blown a bond-bubble and we all know how it ends.  Tell me again how he keeps this going ad infinitium. 

Ghordius's picture

my "love affair" with the EUR has nearly nothing to do with that

the various national banks in Europe have a history. which is radically different from the FED's history

if the Italian National bank was alone, it would still make the same noises... as it always did

yes, the Currency War is hurting savers. that's a frigging global problem, remember? and it began elsewhere, on August 15th, 1971

meanwhile, a saver is free to buy gold, here, isn't he? or a different asset

no country can currently deliver what you are asking for, a government asset for little or no risk. and why? try to answer this question

Haus-Targaryen's picture

I never said "risk free." 

Please re-read. 

Additionally, you still have the artifical creation of demand via increasing the monetary base. This. Will. Not. End. Well.  

I don't understand why this is so difficult for you to acknowledge.  I am not implying the USSA will escape the future the EMZ has in store for it -- everyone is fucked this time. 

I am only pointing out this is a bubble.  It is going to pop.  It is going to end badly. 

You tell me it isn't so bad because your price sheets don't change but once a year (unless of course you transact in a different currency other than the EUR, or any of your raw materials come from outside the EMZ, or you use stuff like natural gas to heat your home or business, but I digress) none of this matters. 

Forward Soviet! 

Ghordius's picture

I also never wrote "risk-free", I wrote "with little or no risk"

meanwhile, I don't think you explained how you are hurt. which leads me back to the original question

Haus-Targaryen's picture

IDK, I mean, printing money out of thin air to make solvent an insolvent entity.  How does it hurt you personally? 

I mean, its not like the effects of this have harmful externalities. 

back to basics's picture

Oh STFU, go try to impress some first year philosophy student, posting on here is not for you. These fuckers have destroyed any semblance of what money represents  (pay attention here, I said money which is far more important than markets which never really existed intervention free) and you are posting shit about breweries trying to impress with intellectual masterbation. 

Ghordius's picture

back to basics, actually... you are right, here. my whole catalogue of comments here was complete intellectual masturbation

because I approached the argument from the point of view of the article. which was about short-term intervention

meanwhile, I did not even notice that my repliers were not going into that, but were about long-term intervention

but no, I am not trying to impress anybody. hence my apology for my below-average contributions in this article

and +1 for your "pay attention here, I said money which is far more important than markets which never really existed intervention free"

I fully agree

ATM's picture

When the basis of commerce is a fraud (fiat currency) there can be no free markets.

It is as simple as that.

debtor of last resort's picture

The people in Cyprus didn't think they were the debtor of last resort.

This time, the never ending push for perpetual growth will blow up everything because central banks killed the hyenas. Now we have rotting flesh all around us.

If you don't hold it, you can't sell it. We sucked up all net energy surplus in half a century through debt and her guardians the central banks.

One orgasm in a sea of pain.

Haus-Targaryen's picture

Running with your beer example ... 

The brewery brews beer and offers it for sale on the open market.  Because the price of the beer isn't high enough (due to inadequate demand) to allow the brewery to keep operating it opens a finance SPV which can buy as much beer as the brewery produces and pays for the beer by giving to its parent company (the brewery) an IOU for the price of the beer.  

The SPV purchases so much beer it drives the price of the beer up to levels that now the brewery can operate at a profit.

Regrettably, the organic demand for the beer from the average joe is no longer existent as it is now too expensive due to the artificial demand.  As organic demand for the beer collapses the SPV purchases more and more beer with IOUs driving the price of the beer up ever higher. 

Then the beer's marketing team runs a series of ads "Gee guys, our beer is so awesome we sell X amount at $X per case because there is so much demand for our beer because it is so great.  Go out and buy as much as you can." 

This is exactly the same relationship the ECB has with the Italian treasury. 

webmatex's picture

Spaghetti Economics = Regretti

fajensen's picture

It will end perfectly, exactly as planned - New ECB money ends up in numbered-only acounts and worthless Italian bonds end up with the ECB, and, since the ECB is setting a floor, the news a signal to print some more OCD-crap for the ECB to buy from us!

Tarzan's picture

Next time I'm short to pay my bills, I think I'll barrow barrowed money from myself

Ghordius's picture

sounds like a swell idea. you first. show the way with your markets. perhaps we might even copy the thing if it works as advertised

Ghordius's picture

lol. the whole "what are we going to bet on, next" "financial establishment" was already licking lips in expectation of a "Brexit event" out of Italian referendum results, and what does the ECB do?

another "make my day, punk" impersonation of "Dirty Harry"

poor, poor... megabankers. poor, poor... volatility punters. poor, poor... "Casino Capitalists"

how are they going to make a honest buck out of europe if the ECB behaves like a badly mannered watchdog? isn't there a kind of right to market, a kind of right to wild swings in prices?

Haus-Targaryen's picture

Ladies and gentlemen, 

May I present to you Ghordo -- everyone's favorite ZH poster who holds the ECB to a completely different set of rules than he holds the rest of the world to. 

"QE is bad, I love gold, but the defends QE and bond purchasers because, evil speculators." 

You sound like a more coherent version of Jeremy Corbyn or Gysi. 

Ghordius's picture

nope. I sound her like a National Socialist, a Nazi, if you want. they sounded exactly like me... and lots more, though

where do you see those "completely different sets of rules"? the FED never buys USTs, for example?

explain to me where is the sense of letting the speculative markets have a go at the Italian bonds market for a while, "just because"

it's bonds, for criminy. buy them to hold, or short them if you find the bank that allows you that kind of betting, or buy and short

the ECB is just another "player" in that. a big one, yes. meanwhile, I don't see where anybody gave you the right to speculate... safely

go on, "make the ECB's day". perhaps they are bluffing

again: show the way. set up a truly free market... outside of theory, in practice

Haus-Targaryen's picture

The problem is the ECB is a big player in that market because it has the ability to create currency. Thus, the demand for the notes at these interest rates is inorganic ... e.g., not sustainable.  

See my rat terrier example from the other thread. 

Ghordius's picture

your example? it's either a rat or a terrier. the terrier is bigger, and can shake the rat to death

now, who is the rat, here? I don't see it. I just see the terrier... barking. identify those rats, please

Haus-Targaryen's picture

The rat is the currency you have in your wallet, the currency you pay your taxes in and the funny money the ECB transacts in. 

Calculus99's picture

What a sorry and tired playbook these central wankers are relying on.

As Stein said yesterday they're scared of change, the whole politcal elite are scared (sans Trump).

ATM's picture

Stein... just another sell out just like Sanders.

Sell your soul and burn in hell, but I am usre both of these fuckers have no believe in souls.

gregga777's picture

The greatest trick that the Germans ever pulled off was getting the Europeans to adopt their Neo-Deutschemark (€ Euro) as the common currency. It's largely controlled by the German Bundesbank by and for the benefit of Germany. The Italian economy will continue its decades long stagnation and shrinkage until they throw off the yoke of the German Neo-Deutschemark.

Haus-Targaryen's picture

Hey dumb dumb, 

You do understand that "benefiting from" is not the same as "being hurt the least"

The was created by the international banking cartel, for the benefit of international banking cartel and at everyone else's expense. 

Ghordius's picture

the international banking cartel? isn't that... pissed off by this very ECB threat?

show me even one megabank, even one megabankster, be him in London or NY that will greet this ECB talk with a hurray

Haus-Targaryen's picture


Show me one megabank, even one megbankster, be him in London or NY that thinks QE creating artifical demand for sovereign debt is a bad idea. 

Ghordius's picture

ah, now I see why we are talking about completely different things

you are talking about sustained QE. now, that is what megabanksters love

the article is about peak intervention. price intervention over a short time

this is what the ECB is talking about in the frigging article which nobody seems to ever read, dammit

Haus-Targaryen's picture

I read every article I comment on. 


rex-lacrymarum's picture

A little bit of history on this: it was the French who insisted the Germans say yes to an "accelerated implementation of the euro". It was their price for giving their placet to German reunification, which had to be approved by all four allied powers. The French hoped that the highly restrcitive BuBa would be succeeded by a far more inflationary ECB, and lo and behold, they were right about that. They only failed to think the whole thing properly through, which is par for the course for this bunch of etatiste and economically ignorant bureaucrat-politcians and their "economic experts". 

niemand's picture

any trading ideas on the next ecb ´whatever it takes´ disaster?

webmatex's picture

Yes bankrupty and Euro ruin.  Toilet paper rules!   I'm not talking fiat.

Billy Shears's picture

The ECB is the MOST RECKLESS of Central Banks in a field of actors falling all over themselves to be Ichi ban. European experiiment is FINISHIED and the sooner the better. This is all they have left, buying bonds of failed western-European countries like Italy, a country not unlike Greece, that was always a very good bet to default. But what bankrupt country could resist; issue worthless bonds and have the bought-up by a central bank. Yeah, stick it to the citizens! When does this lunacy end?

BritBob's picture

Looks like the UK will be heading for a hard Brexit especially when one country (or part of a country in Belgium) can stall negotiations for so long. Looks like S pain will try and play the Gibraltar card  (A worthless sovereignty claim): Gibraltar - Some Relevant International Law:

So it looks like a quick hasta luego !


webmatex's picture

I wish i were a lawyer as rules for members who wish to leave are very clear but i could bill 1000 guinea's per hour:

1) “Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.”

If May could decide what the "constitutional requirements" are before February then i can see very little problem.

jubber's picture

if they aren't  careful they could end up ownng the whole BTP book here!

Gentle-Giant's picture

Allready happening i think. Yesterday Monte dei Paschi was down -13,06 % today up +5,97 %  ????

Along with some other Italian Banks that were down -5% yesterday and up now.

Sivad UK's picture

Trading ideas? 

Well - I'd avoid the herds.

Remember the ECB and EC were not exactly on board with these  "market solutions" for the banks until this internal Itallian referendum became a referendum on Europe following the Brexit vote and the Trump Election. The only reason the ECB is making the right noises now is because they are defending their guy in Italy. He was stupid enought to tie his government to the outcome before the Brexit and Trump votes exposed the level of anti-establishment sentiment in the electorates of the West.

It's clearly Brussles and Rome pushing this false tie in of the referendum to the banking crisis. It's a fear tactic to sway the vote with middle class Itallians. The ECB is just as likely to pull the rug and wind the banks following a Referendum win as they are a loss. In fact the pain trade is a surprise win and then an about face of the ECB on these deals back to the position they held in May - which was these deals constituted illegal state aid (which is still the position of the Germans).

So don't believe the narratives. The referendum has nothing to do with the banking crisis.

Now with the expected loss the ECB will definitely hold fire and hope that the narrative instilled enough fear that the government in Rome can hold on due to "a duty to protect the economy."  Rome is counting on this. However if the government is forced out due to earlier promises to resign in the event of a no vote - then they will kick the can until an election. If a technocratic or Anti-Europe government is formed then they will most certainly wind the banks. A pro-European government will cloud the waters.

Messy enough? 

Ghordius's picture

true this: "The referendum has nothing to do with the banking crisis."

but try to explain it to those "financial markets". they want to position themselves, remember?

brushhog's picture

I dont have a lot of faith in the Italians, or the French to do the right thing. Italians especially are very conservative in their choices, they like things to remain the same, they shy away from change.