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Why the Run on Italian Bonds

Nov. 3, 2016 (EIRNS)—After having made it known it was not amused by the Italian government intention to spend money for earthquake reconstruction, the invisible hand of the European Union's European Commission and European Central Bank (ECB) shifted from word to deed and an attack against the Italian sovereign debt was launched.

The script is the usual one: a rating agency or similar enterprise issues a warning or a downgrading, unleashing a run on Italian bonds. Courtesy of the ECB, Italian bonds are allowed to fall on the market. Then the ultimatum is issued: if you want us to stop that, obey our orders.

This time it was not a rating agency, but a thing called Sentix, run by a behavioral economist, which published a poll Nov. 1 according to which one in every ten investors believes that Italy will leave the euro in 2017. (Sentix is not just a polling agency, but a Frankfurt-based wealth-management fund. Its manager recently wrote on his blog that a repetition of 1987—a stock market crash—is impossible.)

Eventually, a run on Italian bonds was unleashed, driving ten-year yields to a nine-month high of 1.73%. The rise is not dramatic in itself, but remember what happened in 2011, when they toppled Berlusconi’s government. Especially loud in warning about the threat are agencies such as the one named Nomen est omen.

Precondition for the attack to succeed is that, like in 2011, the ECB stops purchasing Italian bonds on the market, which is possibly what is going on now.

Will Renzi back down under a replay of the 2011 scenario? The ways of God are infinite, even if bets on Renzi are riskier than bets on Italian bonds.

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