Why no country wants to access the European Stability Mechanism. The example of Italy.

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by Altruistic_Camel

Saxo Bank

  • The European Stability Mechanism split people’s opinion. The argument that many make it’s straightforward: the ESM provides cheap loans, hence why shouldn’t European members take advantage of it? Well, the issue here is that the ESM is not a charity institution giving out loans to needing countries. The ESM is lucrative, precisely like a bank, and it gives out cheap loans in exchange of fees and economic commitments.
  • To understand why European countries are deciding not to access this facility, it is necessary to know how the ESM works and what is written in the loans’ footnotes. Firstly, the ESM facility gives out loans only for Covid-19 related expenditures, which have already incurred. It means that a country needs to increase its fiscal deficit first, then it will be able to request a loan.
  • Secondly, the maximum amount that a country can request is up to 2% of 2019 GDP. In the case of Italy, last year’s GDP was around €1.8 trillion; hence the country could apply for approximately €36bn to the ESM. Italy will not receive this money on one go; the ESM will dilute disbursements over several months
  • […] it is wrong to compare ESM loans pricing with sovereign yields because they are not comparable. The only way to appreciate the convenience of the ESM is to compare it to the price of a syndicated loan with seniority over the BTPs . The price of that loan will certainly be lower compared to BTP yields. And even though it will not be as cheap as accessing to the ESM, a country would rather pay more than paying the cost of stigma.
  • Right now, Italy can finance itself at the lower interest rates the country has ever seen in history. At the time of writing, the country benefits from negative interest rates for 3-year maturities, while it pays only 12bps for 5-year debt. Yesterday, the country issued €8bn 30-year BTPS in the blink of an eye, with books reaching €90bn in demand. It definitely doesn’t look like a country on the brink of default; actually, it’s drowning in liquidity.

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