Bond tremors hit Italy as eurozone risks come back hard

The northern hawks of the European Central Bank are spoiling for the fight. Austrian Governor Robert Holzmann has called for three price increases this year. It is the same abstinence from Finland and Holland.

Isabelle Schnabel, the German member of the Executive Board and political pioneer, suddenly changed her position. We need to prevent high inflation from becoming entrenched in expectations. It’s not enough talking anymore, we need to act,” she told Handelsblatt in a fire-breathing interview last week.

She talked about ending all purchases of quantitative easing assets by late June, and suggested raising the interest rate – from minus 0.5 per cent – as soon as July. The warning to the markets couldn’t be more clear.

The European Central Bank believes it can continue to protect Italy no matter what, mainly by converting more of its existing portfolio into Italian debt as old bonds expire.

But this means that most of Italy’s national debt has accumulated over time. It collides with dangerous technical, legal and political boundaries. HSBC’s Fabio Balboni said markets were likely to “test” this defense.

European Central Bank staff have been working on another anti-proliferation weapon for months, but that has yet to see the light, possibly because it violates the no-guarantee clause of the Lisbon Treaty. The scheme will face an inevitable challenge in the German Constitutional Court.

If all else fails, there is a final “nuclear option” to stop Italy’s debt. Draghi designed it himself when he was running the European Central Bank a decade ago.

It consists of loans from the European Rescue Fund (ESM), which can then lead to targeted bond purchases by the European Central Bank as a supportive measure. But the rescue plan requires the approval of the German Bundestag and other parliaments. Conditions will be harsh.

The instrument had not yet been ratified in Rome due to resistance from the political right. The Fratelli-Lega alliance will be reluctant to invigorate the process until Italy is on the brink of default. By then, the contagion was spreading through Spain, Portugal and the rest of Club Med would risk replaying the debt crisis of 2011.

In a sense, Italy has been on a political cartoon hiatus since 2018, when voters elected anti-euro parties from both the left and the right in a rudimentary outcry against the status quo.

Enterprise Pottery Forte They found ways to improve this over time, eventually installing a technocratic government to their liking under the ideal Mr. Euro, with no elections along the way to legitimize this 180-degree reversal. They haven’t yet found a way to cancel the vote entirely.

Italian political risks are back on the table, just as the European Central Bank’s debt shield has disappeared.