Here’s the thing about “cancelling” an Italian bond auction. You have lots and lots of opportunities to do it (click to enlarge):
(Dates for August and September from the Italian treasury’s very own, beautifully adorned 2011 auction calendar)
Or maybe, to put it another way, lots and lots of opportunities for the market to test you, once you’ve set a precedent by cancelling just one auction. Dangerous stuff. This is the whole problem with Italy. When markets go terrified of euro-denominated sovereign debt, everything that keeps your bonds fresh, liquid, and constantly refinanced turns into a massive curse overnight. They suddenly become successive hurdles to overcome.
We encountered that lesson again on Tuesday…
There was ‘market talk’ at pixel time that the Italian treasury will consider cancelling auctions scheduled for August and September. Which was denied swiftly by the treasury, of course. No wonder. It’d be like jumping off a treadmill going at full speed and trying to get on again. Plausibly you’d have an incentive from trying to stop the spiral in secondary market yields becoming baked into primary issuance. On the other hand Italy has €46bn of bond redemptions coming due in September and that could only be refinanced with more debt, not met with cash reserves.
Much more likely, we think, that we start seeing bond syndications and/or greater use of private placements by Italy. Anything really. Tapping old issues, going beyond domestic markets — Italy has the capacity to do it if necessary.
Because Italy’s got two big problems.
First they already cancelled one mid-August auction in late July, citing a cash surplus but of course pricking the market’s ears up.
Second — Italy is on its own. No timetable for parliaments across Europe to vote in an expanded role for the EFSF any time soon — therefore you can’t even threaten markets with the idea of EFSF purchases of Italian debt or credit lines. Not that it’s particularly practical to pin your hopes on these things anyway. We have no information on how a precautionary credit line would work or how much of Italy’s EFSF “quota” it would take up. (The IMF’s Precautionary Credit Line is designed so that countries could tap 200-1000 per cent of their quota. Italy provides a €139bn guarantee to the EFSF…)
The ECB? Heh. That would be a sight to see…
Related links:
Spain faces challenge of calming bond market – FT
Turn on, tune in. Step out, bail out. Blow up – FT Alphaville
Why here? Why now? Why this particular eurozone peripheral? – FT Alphaville