Black Friday in the bag. Prime Minister Giuseppe Conte tries to soften the situation that has become hot, "Italy is not a problem for Europe, Italy wants to be a resource".
At the business square theFtse-Mib index collapse of the 4,30 percent, with falls to the peak of bank stocks, Banco Bpm (-9,02%), Banca Generali (-8,83%), Bper Banca (-8,57%) and Unicredit (-8,2%), on the Milanese list no title mark ups.
Returns are rising and spread, litmus test of the tension on financial markets: on government bonds BTP to 10 years pay rates are 3,26 percent, 35 basis points more than yesterday's closing, and spread, the spread with respect to the German Bund rates widens to 280 basis points. The stronger upside, 45 base points is on Btp to 5 years, with 2,40 percent rates and a differential that squirts to 248 basis points. Sui Btp to 2 years yields increase by 40 basis points, to 1,23 per cent and the gap widens to 173 basis points.
It deals with. of pure alarmism because the maneuver has not yet been presented in its entirety. Giuseppe Conte, in fact, "I am very confident in the fact that when the markets, our interlocutors, because we also have financial interlocutors because of the public debt we have, will know in detail the maneuver, as they are all paid to evaluate the investments in the medium and long term the spread will be absolutely consistent with the fundamentals of our economy. As you can see, it is a plan of spending and investments destined to increase the GDP".
Today.it writes, the challenge to the markets of the yellow-green government with an energetic expansion of the deficit, to 2,4 per cent of GDP in the 2019, has the potential to trigger a chaining of events with two very negative developments compared to the rules of the ECB, one on the banks and the other on the securities State of Italy. And it could be these two dangers to contribute to the strong sales of investors on BTPs and bank stocks that are registering in these hours.
The basic problem is on rating that the major international agencies assign to Italy. All three currently give a credit rating (BBB with S&P, Baa2 with Moody's and BBB with Fitch) just two steps above the watershed below which we end up at the level commonly referred to as “junk”. The agencies have monitored Italy for possible downgrades (negative outlook), but today before taking decisions they have chosen to wait for the concrete figures that will be included in the draft budget.
Risks for banks and current accounts
If Italian government bonds fall out of the investment grade, with a double downgrade, or if the agencies show an orientation in this direction, with a single downgrade combined with a new negative outlook, according to the ECB rules a first immediate fallout would invest them banks. They could no longer use the public tricolor issues (if at a junk rating) as collateral for the refinancing of the ECB. In practice, they would have a substantial part of their balance sheet exposed on a completely useless segment to win crucial refinancing to then make loans and transactions in the economy.
Italian banks could still obtain ECB refinancing, but providing other securities with adequate ratings as collateral. Obviously, the drop in the value of Italian emissions then creates immediately a mechanical effect of loss of value of the bank that owns them.
The second major negative fallout would affect the same Italian public securities, due to the purchase plan of the ECB (il quantitative easing). The institution is currently oriented to discontinuing net purchases after the month of December. This channel will close immediately for Italy if it loses the requisite rating (at least an investment grade).
It should not be forgotten how the ECB has so far acquired 356 billion of Italian government bonds which will progressively come to maturity: the institution's commitment, to maintain expansionary monetary policy conditions, is to renew these bonds at maturity, but not if the bonds Italians lost the minimum eligibility ratings on ECB purchases, the latter could not proceed with purchases at maturity.
A devastating scenario because in addition to the sales of private operators (for example pension funds or bond funds tied to certain ratings) on the markets the sales (not absorbed) of the ECB would also be discharged, with a potential spiral effect that could raise rates further. and spreads and costs of rescheduling the public debt.
The danger of the Troika
The only loophole would be to try to obtain an exemption, a "waiver" which, however, always based on the rules of the ECB, implies quite a few requirements. The most important is that of having asked for and obtained a support plan from the ESF, the ESF, which would involve the negotiation of a correction program together with the fund itself and the European Commission. With that the ECB could also activate its antispread shield (the Omt). But this would imply addressing the EU institutions (Troika) with much more attitude than the current one.