Uh-Oh...Draghi's Ammunition To Buy Italian Bonds Before The Election Is Less Than We Thought

Tyler Durden's picture

Having successfully pulled off the announcement of the ECB’s “dovish taper” – where monthly bond purchases will be halved to Euro 30 billion from January 2018 – last month, a challenge for Mario Draghi in Q1 2018 has appeared on his radar. The ECB’s bond buying ammunition is slightly less than analysts thought and there is the small matter of the looming Italian election. The latter is likely to be held in March 2018, although it could take place as late as May. Veteran strategist, now Bloomberg columnist, Marcus Ashworth explains in "Italy's Shrinking Safety Net".

One of Mario Draghi's hands is being tied behind his back just as bond markets may need his help the most. Data released by the European Central Bank this week show the ECB president will have reduced scope to buy Italian bonds if markets start convulsing ahead of the country's general election in the spring. From January, the ECB's Quantitative Easing program will pare its monthly bond purchases by 50 percent to 30 billion euros ($35 billion). Draghi has sought to soften this so-called tapering by emphasizing how the ECB can reinvest maturing bonds to pick up the shortfall.


There's a hitch -- the central bank said it intends only to reinvest proceeds from maturing bonds in debt of the same country. That leaves Draghi with only limited flexibility to use his buying power to the benefit of one country over another.

Monday's release showed that proceeds from these maturing securities, which could then fund new purchases of Italian bonds is both less than expected and likely skewed until after the election. Ashworth provides us with the numbers.

Monday’s release showed that proceeds from these maturing securities which could then fund further purchases of government bonds, will only be about 8.5 billion euros, less than analyst expectations of as much as 12 billion euros. This means the pace of bond purchases under the QE program will fall by about a third from this year's rate of 60 billion euros a month. The first quarter will be noticeably lighter in monthly redemptions compared with the rest of 2018. The big months for Italian redemptions won't come until April and October.

This is inconvenient, especially as the ECB had already been “pushing the envelope” in terms of Italian purchases (and French), as Ashworth laments.

The ECB has already spent most of 2017 buying more Italian bonds than the capital key, a formula that determines how much of each nation's debt the central bank can buy, would suggest. That variation is allowable - but it leaves little extra available slack to cut Italy.

Ashworth notes that the fragmented nature of Italian politics could lead to problems for the Italian bond market in the run up to the election. While the anti-Euro 5-Star is the largest party, its reluctance to form coalitions has significantly reduced its chances of forming the next government. While that’s a positive, Ashworth’s biggest concern is the reaction of the bond market if Silvio Berlusconi returns to, “or even near”, power. As we discussed in “Berlusconi: The Greatest Comeback Since Lazarus?” here, last Sunday’s Sicilian elections were seen as an important barometer for the upcoming national election and Silvio is on the comeback trail.

Nationally, the PD (center-left) is just behind 5-Star, which has 28% support. In the center-right bloc, Forza Italia and the anti-immigrant, Northern League, have 14% each, while the far-right Brothers of Italy have 5%. As media outlets emphasised, much of the Sicilian election campaign focused on the personalities of those involved, rather than the “big issues”, like the economy, jobs and immigration. Ironically, we suspect that Mr Berlusconi will revel in such a situation if it continues in the upcoming national election campaign. Besides cementing the alliance between his Forza Italia, Brothers of Italy and the Northern League, we will be watching as Berlusconi seeks to overturn the ban on his running for public office. Berlusconi, of course, denies any wrongdoing.

Super Mario (Draghi) has enjoyed a charmed existence as President of the ECB. There would be a comic irony if his legacy was tainted by his corrupt, octogenarian countryman so late in his tenure. As Ashworth concludes.

Draghi's toolbox has been downsized. Investors can't say they weren't given fair warning. Their only consolation: his ability to pull a surprise at the very last moment.

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Manipuflation's picture

5 US cents, in coin, for the opening bid for all of their bonds no matter maturity date.

Easyp's picture

How Deutsche Bank’s high-stakes gamble went wrong - https://www.ft.com/content/60fa7da6-c414-11e7-a1d2-6786f39ef675 via @FT

The Euro is a House of Cards.

Ghordius's picture

does anybody.... remember?
headlines like
"Draghi has no Bazooka, no Gun, not even a toy water pistol !!! "
when was that? a few years ago? and no such article ever mentions the 6 National Banks under the hood of the ECB, doing most of the real QE. oh, well...

by the way, OT: UK's Priti Patel resigned. because of her" talks" with Israel. very, very interested to see if ZH will have an article on that

Manipuflation's picture

Yes, but I am not a big ECB investor.  Your EU QE came from the Fed hence the world record equities market prices.  It makes gold cheap.   

Ghordius's picture

"a big ECB investor"? "EU QE came from the Fed"? go on, explain

Ghordius's picture

meh. weak
the Priti Patel story features Brexit, Israel, secret meetings, the Golan Heights, Foreign Aid vs Military Aid, and many other things that are often discussed here on ZH, particularly in the comments
edit: I see you have deleted your original flattering remarks

fx's picture

Exactly. Draghi will continue to "do whatever it takes". If that requires him to walk over stuff that he said earlier - no problem. If he has to violate masstricht treaties and member countries' constitutions - no problem either. The judiciary has long ago caved in anyway. Rules will be made up, broken, and rewritten whenever the ECB sees a need for it.

Ghordius's picture

the ECB violates... treaties? nope

try this, instead:
the premise of those ZH articles is IF the ECB is going to violate... an own, internal rule. one that the ECB Council can change... or not. legally, note

ThinkAgain's picture

Draghi is of the financial branch of capitalism (those who see wrongle a derivitive as the core). Draghi simply doesn't understand that production is the core of an economy (and thereby of the financial system).


Nor he understands that the Global West reached economic adulthood. His assessment is wrong due his background.


If he understood Productive QE (which is anti-inflation by the way) he would enter heydays instead of dire straits. Using the Euro as geo economic tool to boost European production.


Trickling down never worked and will not work ever. Percolating up does. Each export deal of each production company and each energy investment in each households should be facilitated by it (direct online or via the banks).

Open and transparant ledgers by block chain technology.


Catalonia's picture

No mention of Spain? Catalan elections on December 21st could complicate things too.

fx's picture

Catalonia is a non-issue as long as barely half the Catalonians are supporting secession (and many of them reluctantly anyway). They would need a super-determined independence movement supported by at least 2/3rds, better yet 80-90% of the Catalan population to stand a chance against the combined forces of madrid and Brussels.

Imakewinedisappear's picture

Come on ZH, what the heck happened to you? Now you espouse BLOOMBERG's views, the king of MSM perspective? Honestly, how do you DARE writing something like "if his legacy was tainted by his corrupt, octogenarian countryman"? Berlusconi would TAINT Draghi? And you write this? Don't you see the irony here? Hundreds of articles extolling Bitcoin and preppers, crying wolf at the impending Armageddon, and here you cry like a baby because Berlusconi is likely to survive to Draghi? He's already entombed plenty of younger stars of international MSM, in the last 25 years, there would be NOTHING of "comic irony". More like the nth "mess with the best, die like the rest" exploit.

PS Yes, I support SB, but can be critical towards him. Still, I stopped reading MSM not to find this very same sort of smug (and ultimately ignorant) remarks.

Ok, end of the rant, apologies.

bullock's picture

Really ?? you are supporting this guy ?!

Just a couple arguments why ?


Imakewinedisappear's picture

Ghordius wrote many arguments yesterday or a couple of days ago on another article. Here, I'll give you the main one FOR ME:

In 1993, Italy underwent a coup d'etat orchestrated by the judges, known as "mani pulite" ("clean hands"). They killed off all the existing parties except the communists, magically spared. The Communists were poised to finally seize the power in the 1994 general elections, which they had never managed before.

In a few months, Berlusconi put together a center-right party, won the elections, and pulled the carped from under the communists' feet. Since then, the Communist party changed name 4 or 5 times, they really hadn't seen him coming. In the next 20 years, he was targeted by judges, opposition and MSM, who tried to destroy him with all available ammunition.

A bit like what is happening today with Trump, but for 20+ years.

This said, I support Berlusconi the way I support Trump: I agree with half of his positions, but I will be always grateful for what he did...And I enjoyed him surviving all the attacks and coming back.

Last of the Middle Class's picture

Throw 'em a bone, it'll keep you in power a while longer.