As Italy Hints Of Subordination, Did Rome Just Request A "Semi" Bailout?
That Italy is now at most days away from technical insolvency is not news: after all we reported on just this a week ago, citing not some fringe lunatics but Bloomberg economist David Powell who said that "Italy would probably be forced into receiving a bailout if it were to face another two weeks like the last seven days." Specifically, "The country would violate the IMF’s definition of solvency if its average cost of debt were to surpass 680 basis points. The fund defines debt as sustainable if the debt-to-GDP ratio starts to decline before the end of the forecast horizon. A rise to that level would push the ratio up to about 131 percent in 2016 and marginally higher the following year, according to Bloomberg Brief estimates." This was a week ago... so one more week left, and things have not only not gotten better, they have gotten much worse.
Which is why we were not too surprised to read the following news from Reuters: "Italy will push this week at a meeting of euro zone finance ministers for a semi-automatic mechanism involving the European Central Bank or the permanent bailout fund ESM to reduce spreads of euro zone bonds over Germany, Italy's European Affairs Minister Enzo Moavero said on Monday."
Having done this for a while, we can tell Italy what the bond market, having perused the above sentence, just read: "semi-bailout." Because if Italy is implicitly demanding assistance from the ECB, and the Spanish bailout vehicle, the ESM, then things are about to hit the country with the €1.25 trillion in debt. It is all downhill from there. Oh, and here is what the bond market reads when they see ESM: "not so semi-subordination." For Reference: see the aftermath of the Spanish bailout. Because if in Europe the idiotic plan to avoid a bank run is to announce preparations for one, followed by furious back pedaling, it is only logical (and we use the term loosely) that an attempt to avert a bailout will be pursued by requesting a semi version. Instead, that action always and only leads to one thing: waving the sellers right in.
Speaking about the automatic mechanism proposal, Moavero said: "The ECB may do it, but in a framework which would respect its autonomy. The mechanisms would make automatic something that the ECB has so far done autonomously. The European Stability Mechanism (ESM) may also do that, although it cannot act as a bank."
Asked if the ECB should re-start its Securities Market Programme (SMP) of buying bonds on the market, which was originally justified as needed to ensure that markets reflected its monetary policy decisions, Moavero said:
"We do not ask them, because we respect the autonomy of the ECB, but obviously any move to reduce spreads is welcome."
Moavero also said that he doubted if the euro zone's permanent bailout fund, the ESM, would be operational by early July as planned because of the ratification schedule in euro zone countries.
And count your lucky stars that is the case, because the second a class priming, bondholder subordinating mechanism comes into play, forget about comparisons to Uganda - Italy will be Spain right there and then.