Last autumn, borrowing costs for households and businesses in Italy rose as drift and dread took hold in markets, even while the ECB’s own rates remained at rock bottom.
The apprehension eased as the government appeared to give in somewhat over its spending plans. But it could easily return. Italy’s disregard of Europe’s rules was demonstrated in its reaction to Banca Carige’s plight this week, while alarm is rising over slowing economic growth around the world.
Investor doubts remain. UniCredit stumped up a coupon of more than 6.5% this week just to receive three year senior funding (albeit in dollars and in non-preferred format).
This bank is Italy’s largest; smaller ones may not be able to issue at all.
And higher funding costs for banks, or even worse, a liquidity shortage, will inevitably ricochet back on the real economy, both directly and through the government’s own credit profile, given the intractable sovereign-bank nexus.
So how can the ECB help Italy, without rebooting QE? The answer is through TLTRO. It referred to this in minutes published on Thursday.
A Moody’s report last year showed that Italian banks had drawn €250bn from TLTRO, more than those in any other country and a third of the total.
Italy’s government does not want to let banks collapse — the Carige saga shows that. But the banks depend on the ECB's largesse. For all the government’s euroscepticism, it can only push so far.