The European Central Bank’s (ECB) pandemic emergency program should have wiped away all worries. It was only five weeks ago, Italy’s creditors became more and more nervous when Christine Lagarde pulled out the so-called bazooka. “There are no limits to our commitment to the euro,” said the ECB chief after a nightly crisis meeting. The central bankers had just decided to buy government and corporate bonds for 750 billion euros in order to nip a new euro debt crisis in the bud.
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In the days before, the so-called spreads for Italian government bonds had soared – the interest premiums that investors demand to buy debt securities of the highly indebted country, which was hit hard by the pandemic – instead of the German government bonds, which are considered safe. This risk premium had risen to 2.91 percentage points.
After Lagarde announced, the situation calmed down again. But with this calm, it seems to be over, shortly before the EU summit of heads of state and government this Thursday.
On Wednesday, the Italy spread climbed again to 2.71 percentage points. The Spain and Portugal spreads even reached new corona crisis highs.
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It is still a long way from the darkest days of the euro debt crisis in 2012, when the Italy spread was temporarily above 5.5 percent. Italy was very good at getting rid of its debt securities on its recent bond issue. The demand was many times higher than the supply.
But the trend is at least dangerous. After all, the higher the risk premiums, the more expensive it will be for states to borrow in the medium term. And if the ECB’s new 750 billion program is not enough to dispel fears of a new edition of the euro crisis, one has to ask what is yet to come. And above all by whom.
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The EU member states currently seem to be at odds with each other for the big hit. At the summit this Thursday, the heads of government of Italy, Spain, Portugal and France will once again call for corona bonds – joint bonds from all euro countries to deal with the crisis. And they will reject those from Germany, Austria, Finland and the Netherlands again. They don’t want joint liability for debts.
The Northern Europeans will refer the Southern Europeans to the rescue package for more than 500 billion euros agreed two weeks ago: with a short-time work program of the EU Commission, a guarantee fund from the European Investment Bank – and above all additional credit lines through the ESM euro bailout fund of 240 billion Euro. And the southern Europeans will explain why that is not enough for them.
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Italy’s government even mutinates against rescue aid. “Italy does not need the ESM,” said Prime Minister Giuseppe Conte on Wednesday last week. In a cabinet crisis meeting, the populist five-star movement is said to have threatened to break the coalition if Conte accepts the offered 39 billion euros from Brussels, according to media reports.
Pressure on the north
The Italian spread has risen again rapidly since Contes No. “Italy’s government is on a riot,” criticizes Jörg Krämer, chief economist at Commerzbank. She refuses the aid decided to hope for a free ticket in the form of corona bonds instead. “If Rome starts a new conflict with this all-or-nothing strategy, it’s clear that the risk premiums are going up.” Contes government may even have deliberately taken this into account in order to increase the pressure on the opponents of corona bonds.
In the bond market, Italy is “a big topic” again, reports an insider who has already been involved in the euro debt crisis. “If the spread rises above 2.5 percentage points, many investors will be nervous – and the ECB too. The fact that Italy is so keen to sell part of its new debt through corona bonds speaks for very tight public finances.”
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