Italian Bonds Just Above Junk Status

When I was a young man in one of the well established banks in Singapore, we sold government bonds to central banks in big countries like China, Malaysia, Indonesia, Australia, and New Zealand. One of the main conditions for buying such bonds was that the government must have a good credit rating which is at least a AA or Aa Moody’s and Standard & Poors, the two largest credit rating agencies in the world. 

It was the same in Europe – the big central banks would only buy AAA or Aa rated bonds and some central banks would only buy the very best bonds which were rated triple-A or AAA.

The same central banks also preached prudent financial management to their governments by refusing to print more bank notes than was necessary to keep the money circulating without too much inflation. Printing too many banks notes was known to create inflation.

Today that is all down the drain…

Moody’s and Standard & Poors have stated that the bonds issued by the Italian government are just one and two levels above Junk Status respectively and both credit rating companies have a negative outlook for Italy.

So according to what I have spent my whole career learning no big investor in their right mind should be buying Italian bonds today, and certainly not any central bank because we all know that the Virus has had a distatrous impact on Italy’s finances.

But no, I am an elephant in the room, because the European Central Bank has had a charasmatic  Italian boss and now a charasmatic French boss who say that the ECB will be buying as many Italian Bonds as it takes to support the Italian government in their work “to save Italy”. 

Italy will now be borrowing huge amounts in the international bond markets and the European Central Bank is buying these bonds in the “secondary market” through its Quantative Easing Program, a nice name for their policy of effectively printing bank notes for Italy and other weak EuroZone countries. 

There is no real primary market for these bonds and certainly no secondary market. A group of Italian and international banks buy the bonds form the government and hope, sometimes without success  to resell them as soon as posible to the ECB for a nice profit. The bonds then remain in ECB’s portfolio or in the banks’ portfolios until they mature and are immediately replaced by new ones because Italy does not and will not have enough money to repay these loans – but don’t tell anybody – its a well kept secret… 

If I offered these bonds today to any investment fund they would laugh and tell me that only fools and reckless speculators would buy them.

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