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