The ECB is panicking. Time to buy Italy?
What I would have given to be a fly-on-the-wall at today’s emergency ECB meeting to hear how Madame Lagarde proposes to stabilise the fragmentation of European bond spreads.
No matter. The facts are simple:
- Europe is likely to enter recession.
- Domestic strife is set to increase on back of inflation across energy and food.
- European jobs are vulnerable – especially for young people.
- European corporates are weak – default rate to rise to 17% says EIB.
- Crisis is approaching – and fast.
Raising interest rates won’t help. A decade of Negative(ish) interest rates, unlimited QE and sub-optimal growth across much of the Eurozone leaves Southern European economy momentum-less. The ECB has little choice but to intervene or face massive internal disruption.
The trade opportunity is to buy Italy and other struggling European sovereign-credit debt on the basis the ECB will be forced to “do whatever it takes”.
European sovereigns are not issuers of sovereign debt – they have no financial sovereignty. They are sovereign credits – having surrendered their own financial sovereignty to the ECB.
When confidence in the sustainability of European sovereign credits’ debt burden starts to wobble – as it has been doing since Feb (Italian bond yields rising from 1% to 4%), then they become dependent on the ECB putting back in place mechanisms to sustain them.
Watch this space…
Bill Blain
Shard Capital
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https://www.ft.com/content/c519e5d5-f4c3-4554-9484-ddca75cf9bf3
FT:
“After an emergency meeting on Wednesday, the central bank’s governing council pledged to accelerate plans to create a “new anti-fragmentation instrument” — a nod to the widening gap in the cost of borrowing between more stable sovereigns such as Germany and more vulnerable member states.”
Buy. Then sell.