EU deal turns out to be a trap as Italy faces an au­tumn cri­sis and loan from the re­viled ESM

The Daily Telegraph - Business - - Front Page - Am­brose evanspritc­hard

Cel­e­bra­tions have been rudely in­ter­rupted over the EU’s €750bn (£683bn) re­cov­ery fund. Italy is al­ready warn­ing that the money will not come soon enough to avert an au­tumn liq­uid­ity squeeze.

Roberto Gualtieri, Italy’s tech­no­crat fi­nance min­is­ter, told lead­ers of the rul­ing coali­tion be­hind closed doors that the trea­sury would strug­gle to both cover a bud­get deficit near 12pc of GDP and re­deem a moun­tain of old debts fall­ing due over com­ing months.

He urged a for­mal re­quest to the EU’s re­viled ESM bail-out fund to un­lock €36bn of im­me­di­ate pan­demic loans, ac­cord­ing to Il Sole.

The warn­ing stunned the Five Star Move­ment, which was still toast­ing what it mis­tak­enly thought to be a tri­umph at the EU’s marathon sum­mit in Brus­sels. Giuseppe Conte, the premier, was given a hero’s wel­come in Rome. Ital­ian trea­sury data show that €39bn of re­pay­ments fall due in Septem­ber, a fur­ther €39bn in Oc­to­ber, and €42bn in Novem­ber. The com­bi­na­tion of rollovers and the fis­cal shock of the pan­demic may push Italy’s fi­nanc­ing costs to al­most half a tril­lion eu­ros this year.

“There is a mas­sive bor­row­ing need. Gualtieri must be look­ing at the fig­ures and ask­ing who is go­ing to buy all this debt,” said Lorenzo Codogno, ex-chief econ­o­mist at the Ital­ian trea­sury and now at LC Macro.

The ESM bail-out fund is po­lit­i­cal poi­son for Italy, where it is seen as a

Tro­jan horse for a “Troika” regime and is tainted by the bit­ter legacy of the euro­zone debt cri­sis. Any at­tempt to push it through risks split­ting the Five Star move­ment and set­ting off a gov­ern­ment cri­sis.

The EU Re­cov­ery Fund was not de­signed for im­me­di­ate liq­uid­ity prob­lems. Brus­sels says the first tranche of grants will not be dis­bursed un­til next June, although a small ad­vance might be pos­si­ble. Cheap loans will not be avail­able un­til 2024.

Mr Codogno said for­eign funds re­mained wary of Ital­ian bonds at cur­rent com­pressed yields. The at­tempt to tap re­tail in­vestors has “ef­fec­tively failed”. The first is­sue of pa­tri­otic bonds worth €22bn went well in March but the sec­ond is­sue of BTP Fu­tura bonds in July net­ted just €6bn.

The Euro­pean Cen­tral Bank (ECB) is soak­ing up Ital­ian debt un­der its “pan­demic QE” pro­gramme, de­vi­at­ing a long way from Italy’s share of euro­zone GDP. But there are po­lit­i­cal, le­gal, and tech­ni­cal lim­its to this fis­cal ab­sorp­tion.

Un­like the Bank of Eng­land, the ECB is not al­lowed to buy bonds di­rectly in the pri­mary mar­ket. It is re­stricted to se­cu­ri­ties al­ready trad­ing in the sec­ondary mar­ket.

“The Ital­ian trea­sury must find a way to place the debt in the first place,” said Mr Codogno.

The ECB is nav­i­gat­ing a treach­er­ous course af­ter an ex­plo­sive judg­ment by Ger­many’s top court in May, which ruled that the cen­tral bank ex­ceeded its man­date dur­ing ear­lier bond pur­chases and strayed into quasi-fis­cal sup­port for in­sol­vent gov­ern­ments. Cred­its from the Bun­des­bank through the ECB’s Tar­get2 pay­ments nexus – mostly to the Bank of Italy – are likely to blow through €1 tril­lion in July and set off a me­dia storm in Ger­many.

Chris­tine La­garde, the ECB’s pres­i­dent, has sig­nalled that the bank will step up pan­demic quan­ti­ta­tive eas­ing if nec­es­sary. But the in­sti­tu­tion’s body lan­guage does not match the rhetoric.

Hedge funds are hon­ing in on the ap­par­ent in­sou­ciance of the ECB over de­fla­tion dan­gers. They have noted its sched­ule for rapid quan­ti­ta­tive tight­en­ing (re­verse QE) as soon as the im­me­di­ate cri­sis is over, as well as the hawk­ish tone of Ger­many’s board mem­ber, Is­abel Schn­abel.

“What it all tells you is that the gov­ern­ing coun­cil is di­vided. There is go­ing to be a big day of reck­on­ing over this,” said one fund man­ager. Five Star’s adamant re­sis­tance to an ESM loan is in one sense ab­surd. The nor­mal EU con­di­tions for a loan from this bail-out fund are be­ing waived on this oc­ca­sion be­cause of the pan­demic.

By con­trast, sup­port from the new Re­cov­ery Fund comes with dra­co­nian strings at­tached. The in­stru­ment is a sort of EU Gos­plan with un­prece­dented lev­els of cen­tralised con­trol from Brus­sels. The ap­provals process is a bu­reau­cratic quag­mire.

Bor­row­ers must ad­here to the sur­veil­lance machin­ery of the “Euro­pean Se­mes­ter” and meet de­mands laid down in their “Coun­try Spe­cific Rec­om­men­da­tion”, which in Italy’s case means pen­sion cuts, higher prop­erty taxes – and ul­ti­mately aus­ter­ity when Brus­sels de­cides, not when Rome de­cides. The Nether­lands or any of the other so-called fru­gals can pull an “emer­gency brake” and de­mand a freeze in pay­ments if Italy drags its feet.

Yet fis­cal trans­fers un­der the re­cov­ery fund are mod­est. Although Italy re­ceives a head­line €87bn over three years, this has to be set against its po­si­tion as a net con­trib­u­tor to the EU bud­get. Gold­man Sachs cal­cu­lates that the net trans­fer is just €37bn, or 2pc of GDP. It amounts to around 0.7pc of GDP an­nu­ally.

Five Star seems not to have un­der­stood what hap­pened in Brus­sels. The sums of money are too lit­tle to make much dif­fer­ence given the scale of the pan­demic shock. Bank of Amer­ica says the pack­age does “not move the macroe­co­nomic nee­dle”.

Yet the Ital­ian gov­ern­ment has nev­er­the­less signed up to what amounts to a Troika en­force­ment mech­a­nism. The Kan­zler­amt in Ber­lin – work­ing in tan­dem with Ur­sula von der Leyen in Brus­sels – has se­cured what it wanted. This is why hard­lin­ers on the Ger­man Coun­cil of Eco­nomic Ex­perts have ac­qui­esced.

While the com­mis­sion gains pow­ers to bor­row large sums on the cap­i­tal mar­kets for the first time, the sum­mit com­mu­nique states that this is a tem­po­rary fa­cil­ity to cope with a one-off event and should not be taken as a prece­dent.

The pack­age falls short of fis­cal union. There is no joint and sev­eral is­suance of debt and there­fore no Eurobonds. The EU’s con­sti­tu­tional struc­ture re­verts to the sta­tus quo ante later. Five Star has walked into a trap.

Mat­teo Renzi, the former premier, says “re­al­ity” will soon force the in­ex­pe­ri­enced Five Star to re­sile from its former pledges and ac­cept an ESM loan as well. “In the end, the au­tumn cri­sis will be such that the bail-out fund will im­pose it­self. Italy’s lurch into na­tion­al­ism is over,” he said.

Chris­tine La­garde, pres­i­dent of the Euro­pean Cen­tral Bank

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