I just can’t anymore with Italy.
As expected, the European Commission has rejected the country’s budget – this is the first time that’s happened in the bloc’s history. According to multiple sources who spoke to Bloomberg, the E.U. will tell Italy to resubmit the plan.
Despite the fact that this was expected and tipped over the weekend, it seems destined to conspire with Tuesday’s already dour mood to reinforce generalized risk-off sentiment. Italian 10Y yields are at day highs and the spread to bunds wider by ~8bps, though well off levels seen last week prior to the “favorable” Moody’s news.
Last week’s bout of contagion notwithstanding, the rest of the periphery looks relatively resilient. “Peripheral spreads sensitivity to BTP spreads has decreased materially YTD and IBEX volatility has diverged from FTSE MIB”, Goldman writes, in a note dated Monday, adding that for the time being, “this suggests more risks are priced into Italian assets compared to Euro area assets.”
Earlier Tuesday, Prime Minister Conte insisted there’s no “Plan B” where that means changing the budget to pacify Brussels. Of course the Italians also insist there’s no “Plan B” when it comes to the EMU. As ever, the populists want to have their cake and eat it too.
Speaking of having your cake and eating it too, there were more reports out overnight that Italy’s government “hopes” the ECB will change its mind and buy the country’s debt in order to stabilize the market in the event the budget row ends up catalyzing another BTP rout. That came from La Stampa, who also reported that Salvini is begging Conte to beg Russia to buy Italian bonds (beggars everywhere).
The audacity here is mind boggling. Salvini continues to insist that the ECB (and now, apparently, Russia) should subsidize the Italian government if/when the market attempts to assign an appropriate risk premium given the fiscal profligacy inherent in the populists’ budget.
For years, skeptics of the post-crisis monetary policy response have railed against QE and lamented the death of price discovery in global fixed income markets. Now that price discovery is set to make a comeback thanks to the ECB winding down APP, many of those same naysayers are effectively demanding that the central bank support the Italian bond market.
In other words: Hopelessly distorting markets is generally a bad thing, unless of course that’s what’s necessary to allow populist governments to engage in fiscal largesse unhindered by “bothersome” market forces.
Hilariously, the same people who railed against the post-crisis monetary policy response and central bank asset purchases also decried the extent to which that policy response effectively amounted to policymakers monetizing deficits. But now that the deficits are being run up by populists, that same deficit monetization is apparently just what the world needs.