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What’s Keeping Italy’s Government Debt from Blowing Up?

By Don Quijones | 8 August 2017

WOLF STREET — New statistical data from the investment bank Jefferies LLC has revealed a startling new trend that could have major implications for Europe’s economic future: Italian banks have begun dumping unprecedented volumes of Italian sovereign debt.

Holdings of government debt by Italian financial institutions slumped by a record €20 billion in June — almost 10% of the total — after €9.4 billion of sales in May. As the FT reports, the selling by Italian banks is the most emphatic example yet of a broader trend: banks sold €46 billion of government paper in June across Europe, taking the total reduction since the start of this year to €257 billion.

The banks’ mass sell-off is probably being driven by two main factors: first, as an attempt to preempt a pending Basel III reform package that could eliminate the equity capital privilege for EU government bonds [read: Fears of Italy Doom Loop Resurface]; and second, to position themselves for an anticipated autumn announcement from the ECB that it will begin tightening monetary policy.

“Maybe we are seeing an indication of Italian banks catching up with what their counterparts in Spain have known for a long time — that sovereign debt is not the place to be in a world of rising interest rates, said Jefferies’ senior European economist, Marchel Alexandrovich.

But then: who’s buying it? […]

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