November 6, 2011

ECB threatens stopping purchase of Italian Bonds

Three months ago, in exchange for the ECB's purchase of Italian bonds, allegedly the only backstop that has prevented Italian bonds from experiencing an all out collapse to date, Italy was presented with a list of strict "austerity" demands, among which were spending cuts, higher revenues and labor reform. Since then none of these has occurred... or will occur, simply because Berlusconi has no control over the government and cannot care less while taken with more important judicial issues. Well, It appears that the ECB has just made it clear that the status quo is about to end, unless Italy does in fact push with something the ECB will have no choice but to play hard ball. Reuters has just confirmed that The European Central Bank had discussed the possibility ending the purchase of Italian government bonds if it concludes Italy is not adopting promised reforms.
ECB Governing Council Member Yves Mersch said. "If we observe that our interventions are undermined by a lack of efforts by national governments then we have to pose ourselves the problem of the incentive effect," Mersch said according to extracts of an interview with Italian daily La Stampa published today.
The ECB has issued an ultimatum to Berlusconi to get his house in order. The problem is that he can't. Not without stepping down and that will not happen. If the ECB will stop purchasing Italian bonds it will start a death down-spiral on the markets forcing Berlusconi out of power but paving the road to Italy default and economy collapse. We will see how far they will go with the threat and their bluff and how tenacious will be Berlusconi in his preservation fight.
And here is what an ECB ultimatum sounds like:
Asked if this meant the ECB would stop buying Italy's bonds if it did not adopt reforms it has promised to the European Union, Mersch, who heads Luxembourg's central bank, replied:

"If the ECB board reaches the conclusion that the conditions that led it to take a dec
ision no longer exist, it is free to change that decision at any moment. We discuss this all the time."

Since the ECB resumed its bond buying programme (SMP) around three months ago it has purchased some 100 billion euros of government bonds, a majority of which are thought to be Italian BTPs.

Mersch said the ECB did not want to become a lender of last resort to help the euro zone solve its debt crisis and said it was concerned that its job could be made more difficult by governments that "don't meet their responsibilities."
And the punchline:
"Our job is not to remedy the errors of politicians," he said.

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