LONDON (Reuters Breakingviews) - Italy’s latest bond fix idea resembles a covert bailout. The economic spokesman of the ruling League Party, Claudio Borghi, says the euro will collapse unless the European Central Bank limits the gap between euro zone countries’ bond yields, and has suggested 150 basis points as a reasonable maximum. The proposal risks giving big spenders free rein to dodge hard budget decisions.
Borghi is basically building on the pledge to do “whatever it takes” to save the euro that ECB President Mario Draghi made in 2012 when ballooning yield spreads reflected the risk that the single currency might break up. The twist is that the Italian politician wants to put a specific limit on how much borrowing costs can vary in the euro zone. But there are a couple of problems with his idea.
First, there are few parallels between 2012 and 2018. True, gaps between German and other euro zone countries’ borrowing costs could widen this year since the ECB plans to end its money-printing programme later in 2018. Also, the difference between 10-year Italian and German bond yields has doubled in three months, to 280 basis points. But that gap is below its 2012 highs of around 500 basis points. Nor do investors view the moves as an existential challenge to the euro. The yield spread between bonds issued by Spain or Portugal and those issued by Germany is narrower and stayed relatively stable over the same period.
Second, Borghi’s proposed limit is too low and only in line with the average spread since the ECB’s asset purchase programme began in 2015. A study by Italy’s central bank in 2012 gave a range of estimates for the fair value of the spread between 10-year Italian and German government bond yields based on factors such as growth and debt. Most of these came in around 200 basis points. And in 2014, before the ECB began printing money and during the tenure of Matteo Renzi’s pro-business government, the spread averaged a manageable 165 basis points.
Draghi’s original bond-buying proposal in 2012 required countries to accept a bailout, with all the conditions and economic monitoring that entailed. Borghi makes no mention of any such strings. Unlimited and unconditional purchases are hard to justify when a government is unwilling to fix its own policies and would be a bailout by another name.