Berlusconi Risks The Bond Vigilantes' Wrath, By Reneging On All Austerity Promises Ahead Of Refi-Heavy September

As previously reported, Italy is stealthily undoing its entire €45.5 billion austerity plan proposed two short weeks ago, first cutting the provision for tax hikes for high earners, and now also scrapping the proposed pension changes as Ansa reports - the pension proposal, would have excluded time at university, mandatory military service, from calculations of the retirement age and pension level. That is now gone due to a vocal opposition against every single austerity line item. Unfortunately for Italy, which has been hoping nobody would notice: Bloomberg, which has released an analysis titled "Berlusconi’s Backpedaling May Push Italy Back Toward The Brink of Disaster." It is rather self-explanatory: as a reminder the ECB is only buying Italy bonds as part of its SMP monetization expansion due to promises that Italy would slash its deficit and implement austerity. Now that this is obviously not happening, the SNB is expected to balk at future purchases of Italian debt due to Germany complaining loudly that it is supposed to carry the burden of Italy's consistent lying. Already Italian bonds have resumed their climb wider, and explains the weaker than expected BTP auction of 3 and 10 year bonds conducted yesterday.

From Bloomberg:

Italian Prime Minister Silvio Berlusconi may be steering his country back toward the eye of the sovereigndebt- crisis storm as he tests the European Central Bank’s commitment to saving the Mediterranean country from a full-blown economic and financial crisis.


Berlusconi, responding to domestic opposition, said on Tuesday that a previously announced 45 billion euro austerity package, which may have swayed the European Central Bank to buy Italy’s government bonds, will be pruned. The new version will drop the “solidarity tax”, which would have taken an extra 5 percent or more of annual incomes exceeding 90,000 euros. In addition, cuts in funding to regional and local governments that totaled 9 billion euros in the original plan will be trimmed by about 2  billion euros. The Senate will vote on the revised plan next week.

To this add now the pension reform scrapping and soon all other real austerity measures.

The reduction of the austerity package will probably leave the ECB’s Governing Council even less inclined to buy Italian government debt as it attempts to cut its overall level of bond purchases from the 22 billion euros acquired during the week ended Aug. 12, after the 10-year Italian sovereign yield reached 6.2 percent. The central bank had already reduced its weekly purchases to 14.3 billion euros during the period ended Aug. 9 and 6.7 billion euros last week.

Why will the ECB do this? It will be forced to, following 5 failed SMP sterilizations:

The ECB has experienced five failed auctions related to its sterilization operations and is likely trying to decrease the probability of additional failures by limiting the size of its intervention program. The bid-to-cover ratio, the number that will probably provide the first signs that the central bank’s sterilization program is no longer sustainable, of the ECB’s latest weekly auction of 115.5 billion euros was announced yesterday at a healthy 1.32, compared with an average of 0.81 for the failed auctions. A  point may eventually be reached when the ECB is unable to fully sterilize its purchases of distressed debt.

The vigilantes are already reminding Berlusconi they are watching his every lie:

The spread between the 10-year yield of Italy’s government bonds and those of Germany rose by 11 basis points on Tuesday, as investors digested the latest amendments to the austerity package, and has increased by 30 basis points since the ECB completed the Aug. 12 round of purchases, its largest weekly intervention.

Italian stupidity apparently knows no bounds, as it is testing the ECB ahead of the crucial for bond refinancings September:

Italy can ill afford to test the ECB’s commitment as the country prepares for a serious test of its ability to continue accessing financial markets in September, when it will need to refinance 46 billion euros of maturing bonds. That is about six times the amount successfully raised by the Italian Treasury on Tuesday. Berlusconi may soon regret his backpedaling on austerity.

He may. Or he may not: after all a resumption of vigilanteeism in Italy risks pushing the country over the precipice and, yes, pushing the Eurozone with it, which in turn would devastate the Euro, even when factoring for the ongoing purchase of the EUR via China, a contagion which would then spread to the US. And as valiant as vigilantes are, they will hardly risk committing suicide by being too aggressive in punshing the transgressors.

We hope we are wrong, but with the markets soon entering the last quarter of the year, and the levered beta trade back on, we doubt much if anything will happen in terms of punshing gross defection behavior.