The only other option: ‘Orderly restructuring.’ Here’s the staggering scale of the Italian government’s dependence on the ECB’s bond purchases, according to a new report by Astellon Capital: Since 2008, 88% of government debt net issuance has been acquired by the ECB and Italian Banks. At current government debt net issuance rates and announced QE levels, the ECB will have been responsible for financing 100% of Italy’s deficits from 2014 to 2019.
But now there’s a snag.
Last month, the size of the balance sheet of the ECB surpassed that of any other central bank: At 4.17 trillion, the ECB’s assets have soared to 38.8% of Eurozone GDP. The ECB has already reduced the rate of purchases to 60 billion a month. And it plans to further withdraw from the super-expansionary monetary policy. To do this, according to Der Spiegel, it wants to spread more optimistic messages about the economic situation and gradually reduce borrowing.
Frantically sowing the seeds of optimism on Wednesday was Bruegel’s Francesco Papadia, formerly director general for market operations at the ECB. ‘On the economic front, things are moving in the right direction,’ he told Bloomberg. The ECB will begin sending clear messages in the Fall that it will soon begin tapering QE, Papadia forecast. By the halfway point of 2018 the ECB would have completed tapering and it would then use the second half of the year to move away from negative interest rates.
This post was published at Wolf Street on May 18, 2017.
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