The European Central Bank could ease the debt pressure on Italy in five minutes. Many investors would welcome that. But the ECB may consider that not “saving” Italy has done a lot of good.
Just how easily the ECB might bail out Italy is shown by Britain. Why is British government debt not nearing 7-per-cent yields, like Italy’s, but trading at absurdly low 2.2-per-cent levels? The main reason is that Britain has a lender of last resort, which is willing to print its own currency. Italy doesn’t – not yet, at least.
Britain’s ultimate lender has certainly been active. The Bank of England aims to print a total of £275-billion ($444-billion) in its quantitative easing program. Almost all the money will be used to buy British government bonds. This means the central bank’s purchases will more than absorb two years’ worth of fiscal deficit, preventing any debt pressure from emerging.
If the ECB were to print money on a similar scale for Italy, it would be enough to cover not only the €60-billion ($83-billion) fiscal deficit expected for 2012, but the government’s entire €300-billion financing requirement for the year. With British-scaled support, Italy would not need to sell debt in the markets at all. The pressure would be off – for quite some time.
Many world leaders and economists see that as just what the ECB should do. But the ECB’s lack of shock-and-awe has pushed Italy in the right direction. Silvio Berlusconi no longer presides over paralysis. Mario Monti, the new prime minister, has a chance to tackle fundamental problems.
Yet the pressure to print will keep coming as yields in Italy, Spain and other countries stay high or spiral higher. German reluctance to print will also persist. The ECB wants politicians to solve the problems, through fiscal reform or loans. But if the central bank is to buy more bonds, Italy looks the most appropriate recipient. The country’s deficit is modest and its crisis looks one of liquidity rather than fundamental solvency. For the euro periphery as a whole that is not the case – which helps to explain the ECB’s money printing fear.