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…
“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.
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