How can we repay the debt with the ECB if the Italian State, in order to get €100 from the ECB, has to repay 100 plus 1%?

A first clarification: loans are always repaid in return for a

risk premium

. It doesn’t mean that you have to pay a higher value you received! That’s one of the foundations of finance. However, in the meantime, the funding received could have served to


which is new value.

To a quick example, if my


financial or economic is 3% and the loans cost me 1%, well at the return of the money I have forfeited 2% (if the profit is all financial we speak of ‘financial leverage’). This is exactly the mechanism by which a company can expose itself with debts, taking advantage of them. It also applies to states.

Now, however, that 2% of the example must serve a state, together with other resources (basically fiscal and contributory), to pay a lot of things: pensions, , employees, services, infrastructure expenses, possible investments (which should be treated separately), etc.. If the annual balance sheet is negative, there is a deficit in the current accounts and a multi-annual stock of debt is accumulated.

On the financial market, an interlocutor who makes a deficit sometimes not pose a particular problem, but if he often makes a deficit, he inevitably has a considerable accumulation of liabilities on his shoulders. This is the case of the State that accuses a stock accumulated over the decades around 2300 billion.

An indebted interlocutor is never considered very reliable. However, it is not debt alone that makes the music, but also the ability of that interlocutor to increase its profits. In fact, the more this generates profit, the more likely it is that it can honor its liabilities. So the dynamic aspect also counts a lot, not photography, that is to say the

speed differential with which profits and debts increase

over time. There are also other factors to consider in the risk assessment, such as the composition of the debt, but let us stop there.

Having clarified these aspects, let us move on to the reference to the ECB in the application. The latter begins with a false assumption. Indeed,

Italy is not very indebted to the ECB.

. The State is about 70% exposed to Italian creditors, mostly banks, and 30% to foreign creditors.

85% of the debt is made up of government securities. It is estimated that about 15%, i.e. 4-5% of the total, of the above 30% will be held by the ECB at the end of 2018. These are securities that the national banks will have recourse to the ECB. However, we remind you that in case of insolvency of a country, the ECB will pay 20% of the hole, the rest, i.e.

80% of the risk is borne by all national central banks


In order to understand this overall condition, it is necessary to understand how the Italian debt is ‘mediated’ by the ECB and, in particular, by the
quantitative easing

(q.e.) of Dragons, about 60 billion euro/month of money created from nothing. Without this procedure Italy would already be in hell for some years. The q.e. has saved it on average about twenty billion a year.

To say it quickly, the q.e. is not a conventional operation. Such an operation would be the transfer of credit against a return after a few years. This type of process exists (for example, Ltro and Tltro), but by now, the q.e. prevails, along the lines of the American model of Bernanke: the famous ‘money from the helicopter’, thrown to stimulate the economy. As we shall soon see, however, in the case of Italy, that money does not arrive everywhere.

While a conventional operation does not increase the

money supply

(or does so only transiently), the q.e., for its volumes, instead increases the nominal circulating volume and therefore – all other factors being equal – generates


. In recessionary conditions, inflation can stimulate growth. We speak of optimal values around 2% (inflation targeting). Above a certain level (3-4%) is considered a brake, up to values considered destabilizing (10%) or out of control economy (20%).

In practice, the ECB

creates financial resources with a few simple clicks and with those purchases in a first phase government debt securities

Btp, for example. However, since a central bank cannot directly interfere with the issuance of government bonds of different countries, the purchase is made separately. More precisely, each nation issues debt securities in a special circuit. That is where the very first purchase and sale takes place, and it is called the primary market. After that more reserved phase, the securities go to the

secondary market

…vastly larger and populated by all kinds of actors. Well, the ECB intervenes in the latter market, buying and selling Btp or similar national bonds.

Now, a fundamental circumstance is that with the q.e. established by Draghi and the relative massive purchases the value of the securities, because of the

law of supply and demand

, increases, therefore

their return falls, i.e. the risk premium

. Under normal conditions an indebted policyholder such as Italy would require a rather high risk premium. Otherwise no one would buy those securities. With the massive purchases of the ECB it is different. Once you buy the Btp,

the ECB puts them back into circulation

in the vast secondary market.
Here’s the game is : rates have fallen and the money supply has increased. This mechanism is therefore conceived as a push ‘


It is intended to lighten or facilitate (easing) the raising of resources, despite the indebtedness of Italy (or other state) which would otherwise have serious difficulties in refinancing itself.

It is said that Italy has always honored its debts, but it is clear that with the q.e. it is much easier to the debt. In short, it is clear that

this process makes it easier for those who don’t have the accounts in place

that is, it has considerable passivity, and it hinders those who are virtuous. The thought goes immediately to , which, not having as much debt to cover, compensates for the burden, saving on the

export surplus

than the import, instead of putting it back into circulation. Weights and counterweights.

Therefore, the ECB does not keep the Btp, but puts them into circulation as much as possible, except to buy them back when go into suffering (as in these days). Therefore, the Italian State is not indebted to the ECB, but to the holders of those bonds. These, as seen, are mostly

Italian banks, which, in view of the low-interest financing, are therefore enjoying enormous favour

. The concept of ‘easing’ is ultimately all to their advantage.

However, since Italian banks are full of npl (non-performing loans), i.e.

bank bad debts

, due to insolvent indebted entrepreneurs, they

do not use the facility to finance the real economy with loans

. The latter does not grow and therefore the State does not take the tax bill and continues to get into debt to meet its activities. A classic

vicious circle

which the q.e. would like to break, but which increasingly irritates virtuous economies.

I repeat that the State is not particularly indebted to the ECB. It is true, however, that everything is mediated by the q.e. of Draghi (Saint Draghi). Indirectly, Italy and other weak countries (Pigs) burden the strong countries, for that 20% risk rate that all member countries share. In short, Italy matures a debt towards the strong economies that is not transparent and is filtered by the inflationary mechanisms. However, there are models to calculate it. To be clear, in case of

exit from the euro
this debt would be considered and would give rise to all kinds of diatribes in international law classrooms or similar places of discussion.

Now, despite the money from the helicopter, Italy is unfortunately struggling to stay within budget parameters. But, in the end, it has succeeded, given that the State today has a

primary surplus

in current accounts. This means that the stock of debt (2300 billion) is increasing and . Unfortunately, lately it has increased more than GDP anyway, so that the

debt-to-GDP ratio deteriorated

. All this means that the State has to finance itself with new debt every year, increasing the


. The debt-to-GDP ratio is in fact the most important indicator of exposure and country risk ( not the only indicator of this type).

The only way out of the spiral is to bring the debt-to-GDP ratio to a value considered acceptable. An optimal condition foresees a percentage of about 60%, while currently Italy is settling on more than double (130%). The large size of the Italian economy makes this exposure even more dangerous, as a meltdown could have an impact on trading partners.

How can we improve things? Well

either the debt is reduced through spending cuts and the elimination of inefficiencies or GDP is to be increased.

or, evidently, both. As written in the beginning, the regime is obtained when the debt-to-GDP ratio settles. In order to have a 60% exposure, however, the GDP must increase for some time proportionally more than the annual deficit. A difficult task for Italy, but one that other weak countries have at least partially fulfilled.