Mr. Draghi did not have time to carry out the radical reforms necessary to get Italy out of this bad balance. His planned overhaul of the pension and tax systems has stalled. “At the margins, Draghi is pushing through some reforms, but many are still pending,” Codogno said.
The Meloni alliance rebels against EU rules and will only pay lip service to the 58 neoliberal reforms demanded by Brussels. His coalition wants to cut taxes and manage a larger primary budget deficit.
A semi-populist government of that ilk in Rome makes it even less likely that Germany will agree to a Hamiltonian fiscal union, allowing the Recovery Fund to evolve an EU Treasury. This greatly complicates the use of the TPI anti-spread tool. “The ECB cannot give Rome a blank cheque, and it cannot continue to push the limits of monetary debt financing,” said BlueBay’s Dowding.
For now, the ECB is diverting repayments of its bond portfolio from Bunds to Italian bonds, and at a staggering scale. This has technical limitations and is a clear breach of the Maastricht Treaty’s no-bailout clause as long as it lasts.
The TPI was unveiled in early July but details have yet to be worked out. Nothing has yet appeared in the Official newspaper and the instrument is not legally valid until it does.
David Marsh, head of the Official Monetary and Financial Institutions Forum, said there were unresolved questions about who bears the financial risk of TPI interventions. It is unclear whether the tool poses a fiscal risk and therefore undermines the fiscal sovereignty of the German Bundestag, and whether it is compatible with previous rulings by the German Constitutional Court.
“The TPI can only be activated if there is contagion and a whole bunch of countries are under pressure,” said Peter Schaffrik of RBC Capital.
“If things go well, the ECB will be there to buy Italian debt. But could spreads hit 300 first? Yes, they could,” he said.
The real danger for Italy is that it could be slowly suffocated by unsustainable borrowing costs that remain high and expose the underlying pathologies of the economy over time until something breaks. .
The country has reserves of strength. Private debt is low and Italians have some 12 trillion euros in savings and assets. Italy could at any time get out of the sovereign debt trap by confiscating a slice of private wealth and seizing bank deposits like the Amato haircut in the early 1990s, or Argentina corralito.
The chances that the next Italian government will consider such a measure are nil. He would rather default to foreign creditors.