Is there an alternative to monetizing Italy's
SO THE Italian government today asked the International Monetary Fund to monitor its reform
It may or may not be coincidence that
the G20 summit, which ended today, saw discussion about boosting global
liquidity by the use of Magic Money – otherwise known as the IMF's Special Drawing Rights.
Italy needs a miracle. Its debt
dynamics are truly horrible. Take a look, for example, at the recent spike in
12-Month Treasury Bill yields – which are now at pre-crisis levels
(i.e. before central banks started putting unprecedented downwards pressure
on interest rates):
12-Month Treasury Bill Yields
There are rumors that the spike in T-Bill yields
last week was a result of a large MF Global position being unwound as the
brokerage went bust. That may go some way toward explaining the timing of the
spike, but there are good reasons for investors to shy away from short-term
Italian debt – and they go beyond the scary headlines we're seeing
Back in July, Italy's Ministry of Economy and
Finance made an intriguing move. It cancelled an auction of
medium- and longer-dated bonds scheduled for the following month. From now on, it said it would
regularly offer 12-month Treasury Bills instead.
According to its Treasury
Department, Italy has over
€280 billion of debt redemptions coming due over the next 12 months
(including this month's debt). That's almost two-thirds of an (unleveraged)
EFSF. More than half of this debt is due by the end of March next year.
The average maturity on Italian sovereign debt is
around seven years – not too but, but not too great either.
Furthermore, as we've seen, Italy plans to issue a lot of new short-term debt
– at a time when yields on newly-auctioned debt are hitting Euro-era
highs. It won't be long before higher borrowing costs make it impossible for
Italy to service its debt.
Small wonder then that the debt markets are
taking a long hard look at Italy's debt dynamics. There seems little prospect
– short of intervention – that borrowing costs on new Italian
debt will fall significantly any time soon.
The European Central Bank is already buying
Italian debt on the open market. Will it go that step further and buy it at
source – in effect printing money to cover Italy's borrowings and
Without wishing to put too much emphasis on nationality,
it may prove significant that an Italian is now president of the ECB. Mario Draghi has been director general of Italy's Treasury and
governor of its central bank.
Weighed against that is that government debt
monetization is anathema to the ECB – and what's more, it's prohibited
from doing it.
Article 104 of the Treaty on European Union, for
example, says this:
'Overdraft facilities or
any other type of credit facility with the ECB or with the central banks of
the Member States (hereinafter referred to as "national central
banks") in favour of Community institutions or
bodies, central governments, regional, local or other public authorities,
other bodies governed by public law, or public undertakings of Member States
shall be prohibited, as shall the purchase directly from them by the ECB or
national central banks of debt instruments'
Where there's a European will, though, there's
usually a way. Some sort of convoluted arrangement involving the EFSF (or its
planned successor, the ESM) perhaps.
An ECB-fuelled solution has seemed a likely
endgame for a while now (though there is now the tantalizing prospect of SDRs
too). Italy's dire debt problems suggest it may be closer than some people