"The ECB Is Basically Giving The Finger To Italy": Is Draghi Risking Everything To Teach Rome A Lesson

Perhaps the most perplexing market-moving event of the past 48 hours, was the 1-2 punch of a Tuesday Bloomberg report that next Thursday's ECB meeting is "live" in that policy makers anticipate (at long last) holding a discussion that could conclude with a public announcement on when they intend to cease asset purchases (QE), coupled with a slew of ECB members overnight coming out with unexpectedly hawkish comments.

Of these, the ECB's otherwise dovish Peter Praet said inflation expectations are increasingly consistent with the ECB's aim, and added that markets are expecting an end of QE at end of 2018, this is an observation and input that is up for discussion and that "it's  clear that next week the Governing Council will have to make this assessment, the assessment on whether the progress so far has been sufficient to warrant a gradual unwinding of our net asset purchases."

Other ECB hawks such Hanson, Weidmann and Knot doubled down on the central bank's sudden QE-ending jawboning pivot, saying that the ECB could lift rates before mid-2019 due to "moderately" rising inflation, that market expectation of end of QE by end of 2018 is plausible, and that the ECB should wind down QE as soon as possible.

The market response was instant, and it not only pushed both German and Italian yields sharply higher...

... as well those of US Treasurys, but spiked the EUR while sending the USD lower, and unleashing today's euphoric stock surge.

Now, it is hardly rocket surgery that without ECB support, Italian bonds are toast. After all, as we have shown and predicted since last December, without the only marginal buyer of Italian debt for the past 2 years - the ECB - Italian yields would soar, leading to a prompt default by the nation which would suddenly find itself drowning under untenable interest expense.

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This was indirectly confirmed earlier this week, when the ECB admitted that, for whatever stated reason, it had purchased a far smaller share of Italian bonds than normal. In fact, in May the ECB bought the smallest relative percentage of Italian debt since the launch of QE...

... while boosting its Bund purchases.

Needless to say, the Italians, especially the ruling populist coalition, were furious and claimed that Draghi was directly "manipulating" the market to slam Italian bonds and hurt public sentiment just as the coalition was being formed and threatened to place a Euroskeptic finance minister, something EU budget commissioner scandalously suggested last week when he said that "the negative development of the markets will lead Italians not to vote much longer for the populists", a terrible statement for which he promptly apologized as it was... the truth, and revealed that fundamentally the ECB is very much a political entity, and one which got Silvio Berlusconi fired in November 2011 in precisely the same way.

Still, the irony is that beyond the obvious Italian anger at the realization that the nation with the Eurozone's biggest debt load remains an ECB puppet (and on daily life support courtesy of Mario Draghi), the real question was: so what? As we said on Monday:

"yes, Italian bonds are massively mispriced and they will plunge if and when the ECB stops supporting the market, in effect holding Italy hostage. As for the biggest question, it is what if anything, Rome has up its sleeve to avoid such a fate when Draghi's QE finally ends."

The answer, sadly for Rome, remains absolutely nothing, as without the backstop of the ECB's "whatever it takes" policy to keep the Eurozone together, the Eurozone would almost instantly fall apart (which ironically would be a welcome development for Italy, at least in part, as it would allow it to default on its debt in its own currency).

And that is what many believe was what prompted the ECB's strange spectacle over the past 48 hours: the hawkish twist and the barrage of QE-ending comments by ECB members was nothing more than a lesson to Italy, demonstrating what will happen i) if Italy were threaten with leaving the Euro and ii) when QE finally ends... at some indefinite point.

Or, as Bloomberg's Lisa Abramowicz said in a podcast today,  it was the ECB "basically just giving the finger to Italy."

Confirming as much, Anne Mathias, Global Rates and FX strategist for Vanguard, responded that "part of the vocal nature of the 'talking about the talking about' [the end of QE] probably has something to do with Italy, especially as they've been paring their purchases of Italian debt. What the ECB is trying to say is hey, "this is our party, and you're welcome to it, but if you're going to leave it's not going to be easy for you." The ECB is trying to show Italy a future without the ECB as backstop."

A spot-on follow up question from Pimm Fox asked if this is "a situation in which the ECB is cutting off its nose to spite its face, because you can stick to rules for the sake of sticking to rules, but when you have a potential crisis, why wait for it to be a real crisis such as Italy, which the new government has pledged to spend a lot of money, to lower taxes, while they still have a huge government deficit. Why would the ECB do this."

The brief answer is that yes, it is, because sending the Euro and yields higher on ECB debt monetization concerns, only tends to destabilize the market, and sends a message to investors that the happy days are ending, in the process slamming confidence in asset returns, a process which usually translates into a sharp economic slowdown and eventually recession, or even depression if the adverse stimulus is large enough.

As for the punchline, it came from Abramowicz, who doubled down on Pimm Fox' question and asked if the "European economy can withstand the shock" of the ECB's QE reversal, which would send trillions in debt from negative to positive yields.

While the answer is clearly no, what is curious is that the ECB is actually tempting fate with the current "tightening" scare, which may send the Euro and bond yields far higher over the next few days, perhaps even to a point where Italy finds itself in dire need of a bailout... from the ECB. Then again, don't be surprised if during next Thursday's ECB press conference, Mario Draghi says that after discussing the end of QE, no decision has been made or will be made for a long time. At that moment, watch as the EUR and bond yields tumble, and the dollar resumes its relentless push  higher.

Listen to the 6 minute podcast at the following link.

Comments

el buitre khnum Thu, 06/07/2018 - 10:47 Permalink

The tactic which the ECB will use will probably be the same is how they crushed Greece.  However the results may be totally different.  The Italian economy is 10X that of Greece.  France owns most of the Italian CB debt and Germany owns most of the French CB debt.  If Italy defaults and leaves the Eurozone, the Eurozone collapses which would probably cause a GFC 10X bigger than 2008 in about 48 hours.  Furthermore, while its hard to evaluate 5 star, Liga are not socialist pussies and traitors like Tsipris & Co.

In reply to by khnum

gregga777 Wed, 06/06/2018 - 19:14 Permalink

Italy's TARGET2 debt [to Germany] is about €350 billion. That's a much bigger 'middle finger' [directly to Germany] than the ECB paring back on Italian bond purchases. 

el buitre khnum Thu, 06/07/2018 - 10:55 Permalink

Not necessarily.  The Greeks agreed to sell of their national assets in return for the Troika "bail-out."  Must of the bail-out money went right back to the German banks, with the remainder into Tsipris & Co. pockets, and a tiny amount to help the Greek economy.  So the bail-outs to Greece was just the Cabal moving money from its left pocket to its right, preventing a default which socialist corrupt pussy Tsipris went along with.  If Italy defaults on its sovereign bonds, restarts the lira, and tells the ECB to go fuck itself, there would be no confiscation of national assets, unless NATO is sent in to kick out the coalition, establish Brussels martial law, and seize them at the point of a gun.

In reply to by khnum

kavaron gregga777 Thu, 06/07/2018 - 01:34 Permalink

Yeah, but ECB can print easily 350 billions. What will happen when all Italian banks default and people lose their savings Cyprus style? Rome will get owned bad or there will be a middle solution like let the new government have a little dependency and keep those ECB funds coming in. Italy is big but not big enough to face the NWO head on.

In reply to by gregga777

LetThemEatRand Wed, 06/06/2018 - 19:21 Permalink

Go nuclear, Italy.  Default on any debt owned by the ECB.  Pay other creditors, pull out of the EU, and tell these bankers they don't own you.  Or just cave in and continue to live under their thumb.

LetThemEatRand new game Wed, 06/06/2018 - 19:52 Permalink

Agreed.  One thing the bankers know is how to intimidate populations.  If Italy resists, the poor and middle class suffer first and foremost and it won't be long before they call for the heads of their politicians rather than endure some pain.  Perkins laid out the bankers' blueprint for taking over countries which is brilliant.  Evil, but brilliant.

In reply to by new game

chubbar Wed, 06/06/2018 - 19:22 Permalink

If the anti-EU politicians that were just elected in Italy thought that they were going to go unnoticed and unchallenged then they are stupid. Their existence is an existential threat to the EU and they were going to be financially challenged immediately and they should have known that.

The bottom line is that Italy is fucked one way or another. They can either get fucked with no control over their future or they can break free and be fucked with a chance to control their own destiny. I don't see any reason they would bend over for the EU much longer, it's all coming down either way. Might as well get out in front of it and try to mitigate the fallout.

buzzsaw99 Wed, 06/06/2018 - 19:29 Permalink

didn't think draghi would do it but as soon as i saw italy yields spike i knew it had to be the ecb's doing.  Bunga Bunga and shizzledizzle must have both been paying more attention to the Berlusconi fuck over than I was back then because they both called it right.  I guess Draghi is planning to retire in Brussels?  In the long run the ecb can't win because no matter what they do italy will never pay back those bonds.

hooligan2009 Wed, 06/06/2018 - 19:41 Permalink

the ECB cannot differentiate between EU governments, it is not a political body, it is a body of accountants that must treat all governments equally.

can you imagine what would happen to the ECb if all it ever did was favor Germany? oh...wait a minute..never mind.

i'm sure that the other 27 nations are treated the same as Italy, or was that Germany..hey maybe Finland is the treated the same as latvia.. and portugal?

nothing to see here, move along.. to the border exit.

typeatme Wed, 06/06/2018 - 19:49 Permalink

Hey Italy---Look up Iceland's response to the IMF and european central banks....

Do that, reach out to Trump and set up a independent trade deal...In Lira....
Ask Italian Americans to step up---many will...free yourselves

and ship all the migrants home, back to North Africa.....Sink the NGO craft---better,
confiscate them and use them to move the migrant invaders back

And get to making Italian babies....

Good Luck!

new game Wed, 06/06/2018 - 19:50 Permalink

all fake bullshit because for one simple reason: the 2 year should 20+ percent interest based on market risk.

one big fake fuking joke. same here too...

fake markets...

Loki The Trickster Wed, 06/06/2018 - 20:01 Permalink

Stupid posturing from the ECB AND Italy. The truth is that neither one survives w/o the other. Furthermore, Germany needs Italy to be a basket case. With the PIGS out of the Euro area the euro doubles in value overnight thus trashing Germany's competitiveness. 

timehill Wed, 06/06/2018 - 20:16 Permalink

Ladies & Gentlemen,

 

   DEBT is the REAL KILLER! 

 

The ECB is using it as a weapon against Italy, and tried against Britain.

 

EVENTUALLY, debt will bring us ALL down!

 

Just a matter of time!

Let it Go Wed, 06/06/2018 - 20:18 Permalink

With Italy's bonds taking a hit and the country facing political turmoil it is clear this did not occur overnight. All in all, it might be fair to say Italy is a European debt bomb waiting to explode.

Much like what happened in Greece the situation is not sustainable and will not go away.

Italy has been held together only because of the direct intervention of the ECB which made over 102 billion euros of Italian bond purchases in 2011-2012 alone. The article below presents an overall look at how things got this bad.

 http://Italy Update - How Italy Got Into Its Current Mess.html

rwe2late Wed, 06/06/2018 - 20:28 Permalink

 NATO was the military arm established after WW2 primarily to keep the USA on top, by keeping Germany down and "Russia" out.

The Troika ( ECB & IMF & Euro Commission ) functions as the financial arm to serve the same function.

Of course, if Italy tries to break free, Italy will be treated similar as was Greece.

https://www.counterpunch.org/2018/06/06/italian-debt-crisis-erupts-is-t…

Some have mistakenly claimed that Trump policies which are aimed to further "USA" dominance work to oppose the "globalists". Nothing could be further from the truth. Global military and financial dominance is to be directed (continued) from a Washington-London-Jerusalem partnership with "Washington"  as the major "partner".  (The "Washington" base of power consists of the MIC-Pentagon and the global corporations affiliated with the USA.) It is best not to think of the partnership as existing between nations, but instead more the confluence of interests of a global elite who head global corporations and organizations)

For those interests to exercise their desired self-serving dominance, attempts will be made to make Russia, China, Europe, and Iran  submit.

 

Baron Samedi Wed, 06/06/2018 - 22:47 Permalink

Italy and Greece need to link arms, take a deeep breath and punch reset (resuming their national currencies along the way) to get out from under the NATO, EUSSR, IMF, WB and f[r]iends.  Otherwise they can look forward to lots more years staggering while hemhorrhaging  -- aaand the risk that even further right parties will set the agendas.  Any sign of (continued) G-S involvement in any aspect/phase will indicate failure and continued banxter control.

I read on RT that Macaroni and Mama Merkin are pushing for a Yurpeen army.  Guess what   t h a t   will be used for!  Self-evident reason why Yurp was generally disarmed and why it might want to consider re-arming its citizens. They all need written constitutions that provide for armed citizens - incl. the UK.

 

julian_n Thu, 06/07/2018 - 01:51 Permalink

Forget the bluster - the Troika got Berlusconi to comply and they will get this lot to comply.

F*ck what the voters think - they don't matter - just like those in Greece.