Rereading the events with a cool head, the impression is that of a plan designed at a table. First the post-board press conference of Christine Lagarde, so vague about the new anti-spread shield that it leaves everyone disappointed. And the Italian differential on the Bund in the danger area, even rapidly increasing towards 250 basis points. Then, less than a week later from the ritual if it will be necessary, the emergency meeting of the Central Bank Councilafter which it turns out that the Eurotower will reinvest the securities purchased within Pepp and that its technicians have obtained a mandate to immediately study a new tool against the fragmentation of yields in the eurozone.
Good. But not very well. The spread remains high. Despite the APP still operational until June 30 and the obvious doom loop of Italian banks and insurance companies with the Treasury. Another 24 hours and the usual Bloomberg reveals the details: the new shield will operate on the principle of balances unchangedas a purchasing plan tout court it would inflame even more inflation which is already skyrocketing. That is, securities of core countries will be sold to buy those of peripheral districts. Translated, the ECB will sell Bunds and buy BTPs. And this graph
Yield differential between 10-year benchmark Bunds and Eurozone sovereign bonds
shows what the reaction of the paper German indiscretion, not denied by the ECB: a bloodbath, so much so that the yield of the ten-year Bund benchmark has passed intraday from 1.64% to 1.85%, only to then close on Thursday at 172. In short, we are at the mutualization of debt disguised as yet another emergency. A blatant backdoor funding which, net of the fig leaf of the unchanged balances, creates a clear precedent: the Bund becomes implicit collateral for the BTPs. Translated, the very solid German debt is borne by the Italian solvency market.
And this other image
Trend of the Italexit risk proxy tracker
Source: Bloomberg / Zerohedge
it shows plastically how the market welcomed the reassurance that came – albeit informally – from Frankfurt. Not only did the spread close the week in the 200 basis points area but, above all, the proxy tracker of the risk of Italexit has turned sharply to the downside. The recipe convinces. Even the Germans? And here’s the real thing busillis, however, destined to reveal itself not only after Sintra but also after the summer. In short, net of the gas crisis, at least the spread should allow peaceful holidays to the MEF. This chart
Correlation between the ECB balance sheet and the German real estate price index
shows plastically what the Bundesbank’s only real priority is right now: avoid at all costs and conditions a further postponement of the rate hike. The ECB’s announcement, first informal and then official, of a first 25 basis point adjustment in July has in fact interrupted the dangerous tandem that saw the increase in the balance sheet of the European Central Bank paired with the German real estate price index. Which in May fell by 0.3%, the maximum since April 2020 and all thanks to the tripling of mortgage rates since the beginning of the year.
In short, the housing bubble is losing some air. Controlled deflation. Everything that interests you at the moment on the other side of the Frankfurt road, that of the Buba. Which is now anxiously awaiting the June real estate data, which will not only have a positive impact on the confirmed increase in the cost of money but also the end of purchases within the APP umbrella program. The deflation seems destined to continue without explosions. And in a more drastic way. All happy, in short. Italy because it sees the spread alarm return in record time, Germany because it has achieved its most urgent target e Christine Lagarde because she was able to experience her Warholians 15 minutes of glory in Sintrawearing the cloak of the Wonder Woman of the eurozone. A masterpiece.
The real knot? Times. Not so much about the implementation of the program, which in fact does not contemplate any particular technicality and is immediately operational. Indeed, even facilitated in the task by the preventive pricing of a market that has begun to unload Bund with a wheelbarrow. But precisely of acceptance, almost more political-reputational than merely economic, on the part of Germany of a loss of status as a safe haven for the Bundforced to returns stellar for its historical average in deference to saving the debt of others. And not just any other, Mario Draghi’s Italy. Wolfgang Schaeuble may not get over the shock. And summer.
But net of forced compromises, Berlin will clearly impose stringent clauses on the ECB for beneficiary countries and clear and written guarantees with respect to its own sacrifice. In short, Rome is safe but from now on it will almost completely depend on the right of the ECB and Bundesbank to pull the plug on the anti-spread respirator. And at the first postponement in the Chamber or a hitch in the Council of Ministers on a reform requested by Europe, could trigger the Putin strategy: or, sale of Bonds and consequent purchase of BTPs suspended or halved. At that point, we’ll be all over again. Spread skyrocketing and new emergence. But in the vortex of the probable autumn recession, in the middle of the gas crisis and with a government that may have lost pieces in the meantime. We’re safe for now. But for how long? And, above all, at what price?
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