Which Will Be the First to Blow: the Private Sector or the Public Sector?

As a result of the European Central Bank’s credit squeeze, nine out of ten economists polled by the Financial Times on Jan. 6 forecast a sovereign debt crisis of Italy in the near future. This is the easiest forecast to make, given Italy’s €2.5 trillion debt, amounting to 155% of its GDP, combined with the impact of both the interest rates hike and the ECB’s decision to start reducing its stock of bonds purchased under the APP (Asset Purchase Programme) in March, at a rate of €15 billion per month.

It is a known secret that Italian debt has been almost exclusively bought by the ECB in the past years, which has helped keep borrowing costs at low levels. This option will now disappear, at a time when the Italian government needs to expand its budget fo finance support measures for the economy and households.

Not entirely paranoid, the Rome government believes that Brussels and Frankfurt have dropped the favorable treatment given to the Draghi cabinet, with low interest rates and full ECB support. Defense Minister Guido Crosetto, the cabinet member closest to Prime Minister Meloni, was chosen to fire the opening salvo at the ECB. All it takes, he said, is “the common sense of a housewife to understand that some decisions cause negative effects because they amplify the crisis”. The current government thus wants the same debt option granted to the Draghi and Conte governments, and the low interest rates granted to the Renzi government, in order to help Italian families and avoid an increase in excise taxes on gasoline.

In Crosetto’s view, raising rates may be an understandable choice, but it makes no sense for the ECB to stop buying Italian government debt as it once did. “We gave independent bodies, answering only to themselves, the possibility to affect the lives of citizens and the economy, much more than the European Commission and above all national governments can. It is legitimate to ask how fair that is.”

Observers wonder what “miracle weapon” the Meloni government has, to openly challenge the ECB without ending up like the last one who dared to do so, namely the Berlusconi-Tremonti government in 2011. At that time, an artificial run on Italian bonds was engineered, along with a media campaign describing a non-existing insolvency threat. As a result, the government was toppled and replaced with the pro-EU technocratic government of Mario Monti.

Since then, Monti’s name has become a synonym for disaster, but the Italian leadership will not avoid destabilization, unless they understand that the knife is in their hands. A small debt makes you hostage of your bank, but a huge debt makes the bank your hostage, as the popular saying goes. The weight of Italy’s financial and economic figures makes it a pillar of the Eurozone, and the simple threat of leaving the euro would convince Frankfurt and Brussels to be more moderate. But for a threat to be credible, its issuers must be ready to carry it out in the worst case.

On the other hand, the credit squeeze implemented by central banks globally is creating explosive crises everywhere – not just in the public sector as in Italy. We saw harbingers of that in the British bond crisis last November, and the popping of the cryptocurrencies bubble in December. The new year opened with BlackRock blocking redemptions on its U.K. Property Fund, one week after Blackstone had done the same with its BREIT. Credit Suisse had to offer 435 basis points for a £500 million 3-year bond through its office in London.

These are just the tip of the iceberg, and cracks are opening in all segments of the financial systems.