Diamond News

Old bad habits die hard: The dangerous relationship of mutual dependence between governments and banks.

By Don Quijones[1], Spain, UK, & Mexico, editor at WOLF STREET[2].

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[3]. 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, though the average maturity of its cumulative purchases was higher at just under 8 years. 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 even overtook those of Italian banks, which had...

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