Italian Banks Are Dumping Italian Sovereign Debt To The ECB Ahead Of The Election

At the turn of the year, and just over 2 months ahead of the Italian elections on March 4, we presented  a stunning observation from Citi, one suggesting that even before any potential political risk emerges in March, private investors had long ago fallen out of love with Italian BTPs and had taken to the hills.

As illustrated in the chart below, just about every other major investor type has  become a net seller (to the ECB) or a non-buyer of BTPs over the last couple of years. Said differently, for well over a year, the only marginal buyer of Italian bonds has been the ECB (dark blue).

Then, overnight, Jefferies was kind enough to collate the latest ECB sovereign debt flows data, and revealed another stunning finding: one of the biggest sellers to the ECB has been none other than Italian banks themselves!

Here is Jefferies analyst David Owen:

The breakdown below shows significant moves by the banks in all four largest euro area economies. However, the Italian banks are again in the spotlight; they reduced their domestic sovereign debt holdings by a hefty €12.6bn in December, and by €40bn (10.5% of outstanding stock) in Q4 as a whole. There is strong seasonality in the data, as banks book trading profits and dress-up their balance sheets for year-end; but even by previous standards, this move in recent months is unprecedented.

It is indeed, and as a side note, since the start of European QE, some €100 billion in Italian bonds have changed ownership: from Italian banks to the European Central Bank .

On one hand, this is good news as it suggests that Europe's "doom loop" is finally breaking. Recall that the biggest risk facing Europe in the 2011-2013 period was the surging purchases of their own sovereign debt by local banks, which were too afraid to put money into other non-backstopped assets. And, according to some, the resultant record holdings is one of the reasons why the ECB launched QE: to send the prices of European sovereign bonds soaring, unblocking European bank balance sheets and allowing the traditional credit machinery to work again.

The flip side is that while European banks have been selling sovereign bonds, they have been shifting the proceeds into other, far riskier assets, assets which will tumble the moment the market prices in the departure of the ECB as Europe's buyer of last resort.

And while it is unclear how long until that moment of epiphany occurs, keep an eye on Italian banks and their BTP holdings: once the reduction reverses, and banks start bidding up, it's safe to assume that Draghi's next QE program can't be too far behind.

As for the political risk, and potential fallout from the upcoming Italian elections, fear not: by now the ECB is surely one of the biggest owners of Italian bonds, and if something unexpected happens, well Draghi will always pull something out of his sleeve, "whatever it takes."


JIMSJOE2 ukipboy Fri, 02/02/2018 - 06:27 Permalink

I agree. Nothing is fixed in Europe and is getting worse. According to Armstrong Economics, starting in the middle of 2018 and to 2021, The EU, euro, many countries, many corporations, many banks and government pensions will not exist. As most banks, corporations and most countries have already been cut off from capital markets. The only thing propping it up is the ECB creating 60 billion a month out of thin air buying all the toxic sovereign and corporate debt from banks. This capital flight has been flowing out since 2011 and has been moving into the dollars and dollar based assets like US equities.

     Now as the US is on the path to rate normalization capital will accelerate out again and collapse the EU even faster forcing the ECB to finally start to tapper. Who is going to buy the toxic debt? This leaves only the private sector and they will demand much higher rates for the actual risks involved collapsing the whole thing faster.

      The pension crisis has already hit Spain and will totally run out in 2018. Most cities and provinces are broke across the EU. Most banks are insolvent. A shit storm is ready to hit Europe and this cannot be stopped. Brussels, the ECB and Merkel has totally destroyed the EU.

       The question is what planet is the author on?  

In reply to by ukipboy

hooligan2009 Fri, 02/02/2018 - 03:00 Permalink

not a problem, it is illegal to monetize the soveriegn debt of any european government, including that of Ita... oh wait.

this is part of the ongoing process whereby all accumulated trade deficits between germany and spain/italy are guaranteed by the ecb via TARGET2 balances - currently around 900 billion euros owed to germany by spain and italy (0.4 trillion each).

round and round it goes, when it stops the blood will flow(s).

otschelnik Fri, 02/02/2018 - 03:06 Permalink

3 thoughts: 

1. What's the old expression?  If you can't name the fool in the market, then the fool is likely you.

2. Draghi is doing a great service for his motherland...  leaving the EU holding the bag. 

3. If the EU collapses, where's all that sovereign debt gonna go?

hooligan2009 otschelnik Fri, 02/02/2018 - 03:22 Permalink

i have a theory - central banks buy all the government debt and then simply extinguish it.

i can't see how this fails - central banks can just leave the money they have injected into the global system - not as if anyone gives a shit.

the "nouveau financial macro economic theory" will be that it makes no difference whether a government prints money via fiscal deficits or a central bank prints money via QE.

it just doesn't matter!

In reply to by otschelnik

buttmusk hooligan2009 Fri, 02/02/2018 - 04:03 Permalink

sure it matters. people would then just stop using their currencies or exchange them for other goods/currencies and hyperinflation will result. don't kid yourself, there will be no soft landing from that level of central bank manipulation. a government cannot borrow from itself. in essence that would be an immediate devaluation of the currency by the dollar amount of bonds purchased by the central bank. that defeats the purpose of a bond being issued in the first place. the idea that a country can sustain itself with a central bank publicly acting as a branch of the government is absurd.

In reply to by hooligan2009

buttmusk hooligan2009 Fri, 02/02/2018 - 04:33 Permalink

not really, you said they would be buying debt to wipe the slate clean and extinguish the bond. to me that sounds like a straight devaluation of the currency as they would be handing newly created money to the government. that's not what they are doing now. they are buying debt that they are forcing them to honor to hold yields artificially low in the hopes people will accept it so the governments can continue to borrow at very low yields to remain some semblance of solvent. then once they are on more solid footing they will try selling the debt on the open market. that experiment goes haywire when the boj blows up the global bond market, leading to uncontrollable bond selloffs and countries defaulting.


even if they try claiming "whatever it takes", then hyperinflation will happen with the same end result.

In reply to by hooligan2009

giovanni_f buttmusk Fri, 02/02/2018 - 05:06 Permalink

as to the current financial (dis-) order: There will be an out-of-control demolition event. The big one. Really yuuuge. The debt will be extinghuished in this event. By law of nature (google "exponential growth" + "debt").

While in theory it is possible to have this demolition event sort of "controlled", it is highly unlikely. First, it would require a planetary coordination of players whose goals differ but mostly because the US of A is way too arrogant and fixated on keeping its unfair advantage under the current regime.

Russia and China buy gold not because they are gold bugs (in fact they hate non-government-controlled money) but to have something to show for a future monetary base - after the whole shitshow will have come unglued and a new system will have to be figured out, possibly under the leadership of the IMF.

In reply to by buttmusk

hooligan2009 buttmusk Fri, 02/02/2018 - 05:30 Permalink

well, what is the difference between the sum of 20 trillion euro on one side of the fiat balance sheet and 20 trillion euro on the other that cannot possibly be repaid?

zero or 40 trillion?

gold isn't the answer, since it will always generate inflation when population growth exceeds new supply. neither is crypto, since that is just another fiat currency.

fx markets and banking systems are far more efficient than cryptos.

In reply to by buttmusk

fattail hooligan2009 Fri, 02/02/2018 - 08:23 Permalink

This will fail when the people realize their currency is depreciating in their pocket through inflation.  Inflation though is being suppressed through deflationary elements in the west like demographics, technology, and deleveraging when it happens.  fortunately for the FED and ECB people are not smart enough to make the connection between their living standards, reckless policies, bank bailouts, and their fiat currency.  

In reply to by hooligan2009

katagorikal hooligan2009 Fri, 02/02/2018 - 17:27 Permalink

Correct. It doesn't matter.
All the stakeholders are all being paid off by the ECB ....
- the bankrupt banks' junk bonds are bought and buried (bailed out);
- the bankrupt countries' sovereign bonds are bought and buried (bailed out);
- the bankrupt companies' corporate bonds are bought and buried (bailed out);
- the hedge funds make a killing by front-running the ECB,
  with the excuse to move the bonds from primary dealer to secondary market.

There's nothing the morally-outraged peanut gallery can do about it. 
Bond vigilantes will only return when they can make money fighting the ECB,
but at the moment, they are all on the other side of the trade,
snuffling 60bn EUR from the trough each month.

In reply to by hooligan2009

buttmusk JohnGaltUk Fri, 02/02/2018 - 04:15 Permalink

Central banks can never go bankrupt. But they can act irresponsibly enough to create capital flight out of their bonds and currencies, leading to hyperinflation and a collapse of their economies. All it takes it one central bank acting recklessly and irresponsibly (BOJ), to create a massive domino effect of skyrocketing yields across the globe.

In reply to by JohnGaltUk

buttmusk Fri, 02/02/2018 - 04:16 Permalink

The real question is, when the BOJ's recklessness finally blows up the JPY and JGB's will the Japanese government be forced to sell their US treasuries to get an immediate liquidity injection to keep essential domestic services operating? Keep in mind this would all be happening while the Fed is only starting to reduce their balance sheet of treasuries as well. All it takes is one domino to fall to start a massive chain reaction.

Let it Go buttmusk Fri, 02/02/2018 - 06:55 Permalink

Agreed, it is important to remember the global currency system is by design fairly closed. This means relative value tends to merely shift back and forth between the four major currencies that dominate the system, this is the main reason currencies appear more stable than they really are.

It only becomes a real problem for governments to deceive us as to the real value of our currency when this bond is broken. Unstable currency markets can be a precursor to massive shifts in value and a sudden drop in confidence. It is logical to think that in such a situation insiders would be the big winners. More on this subject in the article below.

In reply to by buttmusk

Let it Go Fri, 02/02/2018 - 07:46 Permalink

The Euro-zone faces a slew of problems but in my eyes the most pressing  is that Italy is insolvent and Spain is coming apart with Catalan separatists defying Spanish Prime Minister Mariano Rajoy. 

Easyp Fri, 02/02/2018 - 11:30 Permalink

Brexit cannot come soon enough for me.  Its like rowing away from the Titanic 45 minutes after it hit an iceberg.  The lights are on, the band is playing and all is well in the First Class Lounge but the ship is sinking.