Old bad habits die hard: The dangerous relationship of mutual dependence between governments and banks.
In June, as the ECB cut back on its purchases of Italian government bonds, Italian commercial banks added to their holdings, continuing a trend that began in May, analysts at Dutch bank ABN report. Total holdings in June rose by €17 billion to €381 billion. That came on the heels of a €28 billion surge in May, which was the single largest month of Italian bank purchases of Italian bonds in history, according to Deutsche Bank
For the first time in a long time, Italian banks’ purchases of Italian bonds dwarfed those of the Eurosystem (the ECB and the national central banks of Eurozone countries), which in May and June bought a comparatively paltry €3.6 billion and €4 billion of multiyear Treasury bonds (BTPs) respectively. This happened as pressure on Italian government bonds rose following the unexpected formation of an anti-EU coalition government. In the space of two months the yields on 10-year bonds surged from 1.8% to 3.1%, and are now just below 3%.
It’s a big jump by today’s standards but still far lower than the 7.56% the Italian government was paying in November 2011, during the peak of the Eurozone debt crisis. Nonetheless, a two-year trend appears to be in the process of reversing.
By March this year, the Bank of Italy, on behalf of the ECB, had bought up over €350 billion of BTPs. At one point the scale of its holdings overtook those of Italian banks, which had been shedding BTPs since mid-2016, making the central bank the second-largest holder of Italian bonds after insurance companies, pension funds and other financials. But now, Italian banks are once again buying BTPs hand over fist…