We won’t know if it really did happen, not until next week’s figures on Securities Markets Programme purchases. (Current total: €74bn)
But since there was plenty of rumour on Tuesday that the European Central Bank (via the Bank of Italy) intervened to buy Italian bonds from a terrified secondary market, mind if we point something out in the interim?
This is too big for the ECB. Too big, too dangerous, too much like monetisation of debt — even by the Bank’s collapsing standards. Possible? Yes. Sustainable? Not at all.
It’s not to say the ECB didn’t enter the market on Tuesday. The conditions actually met the SMP’s de facto modus operandi pretty well — which was always one of offering an exit point for long-only investors looking to dump their holdings. Plus, Tuesday saw an auction of one-year paper by Italy. It was always suspected last year that the ECB would choose to intervene just before (or just after) a Portuguese or Greek auction. The ECB might not be able to buy primary issuance itself, but it could either take bonds off private bidders before an auction, to allow them to absorb supply, or permit bidders to flip bonds to it at a point after the auction.
Of course, the actual triggers for ECB intervention have never been disclosed. For all we know, the Bank moved into the Italian market as soon as the Spanish ten-year bond yield hit 6.3 per cent, or perhaps it was focused on preventing inversion in Italy’s yield curve. Indeed that curve was looking battered on Tuesday.
But anyway, this has already been a terrible modus operandi for the periphery. At no point did the ECB achieve its stated aim of ensuring “depth and liquidity in those market segments which are dysfunctional” during the first €74bn of purchases. After all, has anyone seen the trade volumes in Greek, Irish or Portuguese bond markets lately? The absolute capstone of the ECB’s failure was its becoming each country’s single biggest private creditor. Can’t beat markets into coming back, become the market. Case in point then.
But also a case in point — the vast size of the Italian bond market. Especially vast when you count the reams of auctions and issuance entering that market each month. Daily turnover in May of €12bn. Gross issuance in the third quarter of fresh two-, five- and 10-year bonds worth €31bn (not counting the reopening of previous issues). Refinancing needs in the next year of well over €300bn! (Do try this Reuters graphic by the way…)
If the market really wants to fool itself that Italy would become a regular patient of the ECB, we’d really like to know how the Bank could possibly absorb those numbers. Even better, we’d love to enquire how it could sterilise them, as usual with the SMP (and a significant salve to the ECB’s conscience that it is not conducting quantitative easing).
Oh, and we’d like to know where the ECB would go next from crossing the Rubicon of one of the world’s biggest government bond markets.
Anyone noticed the last few days’ blow-out in the French spread to Bunds? It’s at its widest in the history of the eurozone…
Related links:
The slippery slope to non-sterilisation – FT Alphaville (2010)
A loser’s nightmare in Europe’s debt auctions? - FT Alphaville