Italian has a debt doubt as a result of the return of a debt refund, and the ECB dials back a support note

Italian has a debt doubt as a result of the return of a debt refund, and the ECB dials back a suppor ...

- On Dec 21, Italy faces a big question about its debt, with the call from the Central Bank of Europe responding to a call for emergency assistance that helped the most indebted economies survive the coronavirus pandemic.

In 2017, Italy's public debt has increased from 343.8% of the GDP in 2018 to just 153.5%.

Since March 2020, the ECB's purchase of 250 billion euros of Italian debt under its Pandemic Emergency Purchase Programme (PEPP) has stopped borrowing costs, with the 10-year bond yield still higher than it was before the pandemic at 0.9%.

However, the prospect that PEPP will end in March revived worries about Italy, the third-largest economy in the eurozone, which has an acute growth problem and is big enough to destabilize the entire 19-country currency bloc.

"The Italian yields could begin to rise significantly if the ECB stops buying Italian bonds," said Jesper Rangvid, a professor of finance at the Copenhagen Business School.

"The euro zone would collapse again."

The central bank, the Eurozone still has an older, smaller stock-buying scheme, but will still be able to take the stock in 12 months, or even in the middle of the year when inflation is stabilizing at its target of 2% after high swings during the pandemic.

Some have even called out the crisis of the Eurozone last year, where a rise in bonds of Greece, Italy, Portugal and Spain dominated the economy as they waited for an attack on the dollar.

That ended in an effort that the then-ECB President pledged to do "whatever it takes" to save the euro - code for a stock price of troubled states.

If the ECB stops buying, or removes the commitment to 'whatever it takes' purchases, the debt service costs will climb again to cause the doom loop," said John Cochrane, senior scientist of the Hoover Research Institute at Stanford.

THE DRAGHI ENFORCEMENT IS EFFECTIVE.

Finding a solution may not work for Draghi, now he is taking over a broad coalition.

Much of it will depend on 200 billion euros in grants and cheap loans from the EU's recovery fund, available through 2026, unless Italy continues to meet Brussels' policy demands.

The former cheque of ECB for the economic world expects to gain a lot of protection in the market with Brussels and other markets.

Yet the more-old economy is weak, it includes a low unemployment rate, poor productivity, poor performance, a lack of investment in education and technology, a whirlwind of bureaucracy, a northern-south divide.

And Draghi is widely predicted to be named soon after becoming the new secretary of state, he'll be stripped of direct executive power in the last year before the election in 2023.

"I think that political parties will kick the game and many reforms won't be approved," said Lorenzo Codogno, an ex-Chairman of the Italian Treasury who runs the consultancy LC Macro Advisors.

BUFFER - FOUR FOUR.

Italy's low interest rate has helped keep the area in a slush of a market storm.

With the annual dividend of USD 8 trillion in 2018, Rome sold 15 million to pay for a credit in 2007, when a 5% debt to GDP ratio was 104,48%, according to OECD data. In 2020, the cost of borrowing increased to 3.33%, despite the debt ratio ballooning to 156%.

The Italian Treasury took advantage of the ECB's generosity, to extend its debt, and protected itself against a sudden surge in yields.

That has lowered the hurdle that Italy must clear for its debt to keep its debt stable. It has calculated that its pace of economic growth is better than its interest rate.

"You don't need a macroeconomic miracle for a stable debt path. But of course you need growth and inflation," said Dirk Schumacher, a French economist.

ONE way or another, the tyrant is yours.

But Italy's history of political instability and lingering growth implies even that can't be taken for granted.

A global rise in yields causes a backlash for world economy.

If that happens, investors will want to find out whether Christine Lagarde is ready to turn her predecessor's promises into honourable.

"I'm pretty confident that ECB will do it again, in case of financial fragmentation," said Frederik Ducrozet, strategist at Pictet Wealth.

When Italy suffered a debt high early in the pandemic, Lagarde, a former French finance minister and head of the IMF, said the ECB isn't here to cut out the spreads between eurozone-based countries' bonds yield.

She made up the comments, but doubts surrounding her commitment lingered.

"It still echoes in markets, and undermines the ECB's credibility," said Carsten Brzeski, an economist of Dutch bank ING. "That was very expensive."

Our standards: ours.

You may also like: