Riesplode anxiety about BTP rates and the BTP-Bund spreadwith the QT-Quantitative Tightening formally announced by the ECB by Christine Lagarde.
In addition to announcing the rise in the three main reference rates of the euro area, the European Central Bank has in fact expressed the‘intention of start reducing your budget, inflated in all these years with the program contrary to the QT, or the QE-Quantitative easing, in technical terms APP (PPA in Italian).
The BTPs couldn’t handle the blowalthough the announcement has been in the pipeline for some time: the QT, even when it seemed distant, it was always seen as one threat to the Italian paper and, in particular, for all government bonds of peripheral countries, or even of Southern Europe.
In the case of Italy, the vulnerability of sovereign debt is explained by the original sin of the public debt, which is too high compared to GDP.
Not just rate hikes, QT ECB: the slap in the face of BTPs and spreads
However, the negative effect, particularly on BTPs, had always been underlined. Reason: the mass of Italy’s public debt, pretty much the same reason he had brought Mario Draghi, at the time when he was still president of the ECB to launch QE, to lock down the country from speculation.
A QE that is no longer sustainable, given that inflation continues to gallop in the euro area, also due to that immense liquidity injection that Frankfurt has been carrying out for several years.
Recently, the QT had been somewhat sponsored by as well hawkish Eurozone countries such as Germany and the Netherlands.
It is worth recalling what he said a few weeks ago the number one of the Bundesbank, Joachim Nagel.
Nagel had underlined the urgency that the QT start at the beginning of 2023: in this way, according to the German banker – hawkish like my Dutch colleague – the ECB would have confirmed “Strong Determination” to bring down inflation, while continuing to launch “mosse decisiveon interest rates.
The president of the German central bank had gone further, also asking the stop of reinvestments:
“We should start reducing the size of bond holdings early next year, without making any more reinvestments full of all the bonds that come to maturity”.
Were these requests satisfied?
Partly yes.
Lagarde confirmed what is written in the press release with which the ECB made the announcement on rates. That is, it reads as follows:
“The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP (APP, i.e. QE) until the end of February 2023. Thereafter, the APP portfolio will be reduced (therefore the QT will start) at a measured and predictable pace, as the Eurosystem will only partially reinvest the principal repaid on maturing securities. The pace of this reduction will be equal to an average of 15 billion euros per month until the end of the second quarter of 2023 and will then be determined over time”.
READ: The story of the ECB bazookas APP and PEPP
QT: this is when Italy’s ECB crutch will fall
Basically, the reduction of the BC portfolio-balance sheetand engulfed by euro area government bonds that have been purchased in recent years, starting in 2015, will begin in March next year, therefore in early 2023.
A published article sull’FT-Financial Times da Martin Arnold he had already highlighted Italy’s precarious position.
“Debt sustainability concerns could resurface in countries like Italy as interest rates rise more and the ECB moves from being a net buyer of bonds to an institution that sells them instead. he had commented Veronika Roharova, chief euro area economist for Swiss bank Credit Suisse.
To get an idea of the sovereign debts that the ECB is preparing to unload, a few numbers are enough:
are worth 5 trillion euros of bonds that the European Central Bank holds on its balance sheet, and it is these 5 trillion euros of bonds, which include a huge chunk of BTPs, that will be disinvested. Of course, gradually, as confirmed by the ECB.
Said this, the QE-PPA crutch for Italy, (necessary in any case for many other countries in the euro area), is about to be withdrawn. And the problem is that Italy may not have learned to walk on its own: far from it, since he never did.
More than natural then anxiety about BTP rates and the spread.
Ten-year BTP rates thus shot up on the secondary market by almost 27 points (26.8 points), flying at 4.125% leading the BTP-Bund spread to flare up beyond the 200 point threshold, up to 201.5, up by a good 10 basis points.
It must be said that the problem is not ‘only’ represented by the ECB’s decision pull the plug on shopping (albeit, let’s repeat it, gradually).
There is also the question of the need for governments to finance those aid measures against the energy crisis which are about to be launched with the respective budget laws: aid to the citizens of the respective countries, to make it more bearable for consumers the bitter cup of #caroenergy and #carobills.
And aid on which in reality Christine Lagarde, during the press conference following the announcement on rates, also held back, where she said that, if it is true that these stimuli can bring down the weight of inflation now, they risk then returning to inflame itthus forcing the ECB to continue to be aggressive.
Not for nothing, Lagarde gave an important preview, namely that rates in the euro area they could be lifted by “50 basis points” for some time.
ECB: inflation is on the rise, significant rate hikes expected
Inflation is on the rise, and Frankfurt expects the risks are still to the upside.
“Inflation is still too high”: admitted Lagarde, predicting, in spite of the markets, still significant rate hikes, which will inevitably hurt the economy, given that the outlook of the Eurotower experts is one of a recession.
Eurozone GDP will contract both this quarter and the next. The recession, Lagarde attempted to reassure, will happen anyway short-lived and shallow.
The point is that rates will most likely continue to rise, after being raised today, precisely, by 50 basis points: to be precise, the interest rates on the main refinancing operations, on the marginal lending facility and on the deposits at the central bank they will rise respectively at 2.50%, 2.75% and 2.00%, with effect from 21 December 2022.
Just the rise in these rates will result in a further increase in the cost of financing public debts.
It is certainly no coincidence that the State, or rather the Meloni government, to be even more precise the League of Giancarlo Giorgetti and Giulio Centemerois thinking of convincing Italian families to invest their savings in BTPs for Italians only, a mix between BTP Italia and future BTP, which someone has defined already autarkic and/or sovereign.
As for the PEPP (Pandemic Emergency Purchase Programme), in today’s press release from the ECB we read that “The Governing Council intends to reinvest the principal payments from maturing securities purchased under the program until at least the end of 2024. In any case, the future reduction of the PEPP portfolio will be managed in a way that avoids interference with the appropriate monetary policy stance ”.
Yet, “the Governing Council will continue to flexibly reinvest the principal payments from maturing securities of the PEPP portfolio, to counter the risks to the monetary policy transmission mechanism attributable to the pandemic”.
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ECB and rates, eToro replies: are Lagarde & Co. exaggerating?
The news of the latest act of 2022 of the ECB and the effect in particular on the BTPs and on the spread were commented by Gabriel Debach, market analyst at eToro.
Like this the analyst interviewed by FOL:
“The ECB has shown itself to be much more hawkish than one might have imagined. Recession becomes increasingly likely in the near term, albeit short and shallow, while inflation still remains ‘too high’ and, according to the projections, such as to remain above the target for a period of time ‘too long’. To all this is added the new QT programme, with a plan that provides for reductions in the Asset Purchase Program for an average of 15 billion euros per month in the second quarter, with a pace still to be defined subsequently”.
Debach noted that markets have responded to the ECB with “sales on the equity sector, increases in government bond yields, widening of the spread and rising euro“.
The trend of the markets was motivated as follows:
“What frightened the markets is not so much the expected rise of 50 basis points, but an ECB reporting new ‘significant’ rate hikes in the future. Markets that are revising future rate expectations upwards, with a fight against inflation still far from being eradicated. Indeed, the decline in November does not seem to generate enthusiasm, with food inflation and underlying price pressures throughout the economy that have strengthened and will continue for some time”.
“Given the upward response on the spread, which went from 196 points to the current 204 – pointed out the eToro expert – attention to local public debts (Italy in primis) remains closely monitored. The central bank’s plan to cut its support for sovereign bond markets comes as euro-zone governments they are ready to issue more debt next year to cover the cost of protecting households and businesses from the impact of high energy prices this year”.
“To evaluate whether or not this ECB response is exaggerated, just compare it with other monetary policies globally. Although the risks of recession are more present in Europe than in America, the ECB has the exclusive mandate to monitor price stability”.
E , “with double-digit inflation, with only the November reading returning a decline (the first since June 2021) and mostly, as highlighted today by the ECB itself, generated by the fall in energy prices, it is difficult to think that price pressures are a thing of the past”.
Moreover, “The European Central Bank decided to adopt a hike path only since last July, starting with a hike of 50bps (its first for almost 11 years) and reaching a total of 250bps to date. During the same period the Fed raised rates by 425 basis pointsstarting from March, while la Bank of England, in the last year, it has seen an increase of 340bp”.
“Therefore speaking of exaggeration on monetary tightening, with only four hikes made, two of 50 and two of 75 basis points, that seems premature – conclude Gabriel Debach – While monetary policy can do little to influence inflation in the very short term, it is essential that the central bank takes the necessary measures to ensure the stability of inflation expectations over the medium term”.