Will the ECB Kill Italy?

The FOMC will hike the funds rate next week, but that will set policy looser than it was at the last hike in March. The ECB may talk about further tapering, but fears of the imminent wrap-up or unwind of sovereign bond purchases are overheated. So far they have done no visible good anyway, and it has made little difference that they have already been substantially tapered form their peak almost two years ago. The ECB will not want to say anything that would destabilize Italy, for whom halted purchases would take 10% to 25% of demand out of monthly refundings. Italy has the strong hand now in negotiations with the EU over tax cuts and immigration, because the threat to leave the euro currency would lead to a global systemic event. If the populist coalition can hold together, it could take the second step after Brexit to truly reform the EU. Like Trump’s trade and denuclearization initiatives, it’s a high-return high-risk game well worth playing.