Amid the ongoing global equity malaise, just about the last thing anybody needs are more negative headlines out of Italy.
But when it rains, it pours, which is why on Thursday afternoon, Reuters reported that the ECB will not throw Italy a life preserver in the event the government or the banking sector runs out of money. That is of course unless the populist government first goes hat in hand to the E.U. for a bailout.
That’s according to five sources Reuters spoke to in Indonesia, where the IMF is holding its annual pow wow.
“The sources said Italy could still avoid a debt crisis if its government changed course but should not count on the central bank to tame investors or prop up its banks”, Reuters writes, adding that “EU rules do not allow the ECB to help a country unless this has already agreed on a rescue program – political jargon for a bailout in exchange for belt-tightening and painful economic reforms, an option the Italian government has firmly rejected.”
This comes on the heels of the latest bout of turmoil in Italian assets, which began on September 28 after Deputy PMs Matteo Salvini and Luigi Di Maio brushed aside Finance Minister Giovanni Tria’s warnings on the way to setting a deficit target for 2019 that’s out of step with Brussels’ guidelines.
In the days since, Italian yields have risen sharply and the spread to bunds has blown out beyond 300bps as BTPs take a beating.
(Bloomberg)
On Thursday, Italian stocks officially fell into a bear market.
Meanwhile, Italian financials dove 2% on the day and are down some 34% since Five Star and League took the reins.
You’re reminded that in late August, rumors started to circulate that the Italian government would implore the ECB to craft some kind of BTP-centric QE extension that would effectively prevent the bond market from punishing the government for a lack of fiscal discipline.
