While it certainly can be said that the Europeans are not the only ones guilty of a little “creative accounting” or even a game of financial “Three card Monty”, the situation in Italy and some of the other countries in the European Union is rapidly becoming somewhat of a game in the recent months.
During the Wednesday auction, the Italians managed to sell 9 billion Euros of 6 month debt at 3.25 percent as opposed to 6.50 percent the previous month. So with that being said, all is well now, correct? Not so fast.
The ECB has recently lent over 500 banks money under the LTRO facility for three years at one percent per year while the banks are lending Italy at an annualized rate of 6.50 percent. To further complicate things, the bonds that they just purchased from Italy will be parked at the ECB as collateral for the loans that were just taken out. Because of this convoluted relationship, it is actually a matter of the ECB giving away money to the banks in hopes that they will float Italian (and other European) debt. In essence, the ECB is taking a roundabout route to buying the Italian debt. While not directly doing it, the ECB just printed money.
The bonds are still selling at a high premium to bonds from other countries such as Germany and the United Kingdom, so the market wasn’t necessarily fooled. The buying of these bonds was more than likely preordained, and was always going to be done as part of the program. The Italians will also be selling three and ten year notes this week as well, and one would think those are going to be a much better barometer of any real interest in Italian notes. The ability to attract buyers with almost free money to a guaranteed profit over six months is hardly a sign that things are solved in Europe, far from it.
To think this crisis is getting better is probably getting a little ahead of ourselves. The fact is that the accounting games are continuing, and until Europe gets an actual fiscal union, there is little chance the crisis will be solved permanently.