July 24, 2021

Italy looks to the precipice just as the ECB begins to withdraw the network

Italy looks to the precipice just as the ECB begins to withdraw the network

Ángel Gómez FuentesÁngel Gómez Fuentes

Correspondent in RomeUpdated:

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Italy lives crucial days. They worry about their accounts, their open challenge to the European Union and the growing loss of credibility. This Friday the newspapers highlighted a reserved meeting held on Wednesday by the President of the Republic, Sergio Mattarella, and the president of European Central Bank (ECB), Mario Draghi, in the Quirinal Palace. With the risk premium in the clouds, in the vicinity of the 300 points, Draghi wanted to personally express to Mattarella his concern for the state budget and the risks that Italy faces in the event of an attack on the markets of public debt securities, with an even greater increase in the risk premium and interest rates that could be at unsustainable levels for Italy.

The president of the European Central Bank, which in recent times has made some public warnings to Italy, considers that the Italian populist government is underestimating the context in which the budgets have been drawn up, whose final data was known on Thursday night. Given the pressures received, to avoid isolation and appease the markets, the Government took a slight step back, after assuring at the outset that the deficit would be 2.4% for each of the next three years. The Executive has confirmed some budgets thinking about the elections: the deficit will be 2.4% in relation to the GDP for 2019, that is, three times more than what the Executive of Paolo Gentiloni had foreseen; but it will fall to 2.1% in 2020 and reach 1.8% in 2021.

At the mercy of the markets

The serious problem of these expansive budgets is that public debt will increase, which already reaches a monstrous figure: two trillion three hundred billion euros, which represents 132.5% of GDP. In the last two and a half years, the «Quantitative Easing» (Quantitative Expansion) of the ECB it has achieved that the risk premium and the cost of the public debt were low. But taking into account that Italy needs to place 400 billion euros in public debt securities on the market every year, the cost can be very high if the markets lose confidence in Italy. Especially since the program of purchase of public debt (quantitative expansion) of the ECB will end on December 31, 2018. The next day Italy will be without that precious network. In case of difficulty, it would have as its only lifeboat to resort to the OMT program (monetary transactions of sale), through which the ECB can acquire unlimited sovereign debt in the secondary market of the country that previously requested the financial assistance to the Eurogroup.

Draghi has already warned the President of the Republic in a private meeting of the seriousness of the situation

Obviously, that aid program should be agreed with the European Commission and the Save-States Fund, also known as ESM, the European stabilization mechanism of the euro. "The worst scenarios are no longer just a remote hypothesis, but a concrete eventuality," wrote the newspaper "La Stampa" on Friday, in an article entitled: "The alarm of the European Commission is triggered: Italy is too big to be saved » The reality is that the case Italy is disturbing the European institutions about the possible consequences of a crisis in Rome. «An intervention of the Save-States Fund would be impossible».

Notice of Dijsselbloem

In the next five years Rome would need about 200,000 million euros a year to finance its public debt and the capacity of the Salvadoran Fund would soon prove inadequate », wrote in his book« The crisis of the euro »the Dutch Jeroen Dijsselbloem, former finance minister and president of the Eurogroup until January 2018.

Faced with the fears of European institutions and markets, the Economy Minister, Professor Giovanni Tria, explained the budgets with empty rhetoric because it does not specify anything: "Our government action will unite growth and fiscal discipline, honoring the commitments of growth of the economy, but also those of progressive reduction of the public debt ». Actually, the professor Giovanni Tria he is a very weak technician because in the Government the criteria of the populist leaders of the government coalition have been imposed, the vice-presidents Matteo Salvini, secretary of the League and minister of the Interior; and Luigi Di Maio, Minister of Labor and Economic Development.

The European Union distrusts these numbers and, although it is wanted to avoid the confrontation in the negotiations that now will be opened, diverse means indicate that the red semaphore of Brussels will arrive in letter in the last ten days of October

Minister Tria had negotiated with Brussels a deficit of 1.8%, but, seeing itself in practice unauthorized by the populist leaders, the resignation was raised and the President of the Republic, Sergio Mattarella, had to intervene to dissuade him, since his farewell to the Government would have created much more instability and tension in the markets. In the end, budgets have imposed the criterion of the populists, who share the 21,500 million euros of extraordinary expenses largely allocated to pay the two main electoral promises: Citizenship income, a kind of employment subsidy, electoral flag of 5 Stars Movement, it will cost 10,000 million euros. Some six million unemployed people will benefit from 780 euros as of March for a maximum period of 18 months. The leader of the M5E affirmed, Luigi Di Maio, which thereby eliminates the poverty of Italy. But experts say that this money will constitute a kind of charity or charity that will not allow its beneficiaries to escape poverty. As already foreseen many contrivances to collect that subsidy while doing a "black work", the leader of the M5E, Luigi Di Maio, ensures that fraudsters will be punished with 6 years in prison.

The second important item in the budgets is a counter-reform of pensions: 7,000 million euros to allow advancing the retirement age. The data that is given on the growth is considered little credible: the GDP of 2019 will grow 1.5%, when the current trend is less than 1%; for the following year, 1.6% is foreseen; and in 2021 it would reach 1.4%.

Distrust of Brussels

The European Union distrusts these figures and, although it is wanted to avoid the confrontation in the negotiations that now will be opened, diverse means indicate that the red traffic light of Brussels will arrive by letter in the last ten days of October, according to «La Repubblica».

The second blow for the Government, with repercussions in the markets, can arrive at the end of October with a negative assessment of risk rating agencies, in particular Moody's that could lower a step the valuation on Italy leaving their titles on the verge of junk bonds.


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