Just as we discussed last week, Monti has delivered a tough but fair budget which comprises both tax savings and incentives (the deductibility of the horrible IRAP tax is certainly welcome and long overdue). Has he done enough? Probably not, but in only just over a couple of weeks in office, this can be considered a very serious achievement.
Interestingly, Monti has described his Emergency Budget as a Save Italy bill. While Monti couldn’t say it given that he needs their votes, the last famous times that parliament voted save-something bills was to save Berlusconi’s TVs from being put off the air. This time, Monti said, we need to save Italy, and indirectly, the entire Euro endeavour. Will it do the job? Well, the markets clearly liked it a lot, sending the infamous BTP-Bund spread well below 400bps from a high of nearly 550bp four weeks ago.
But the ball is now back with Sarkozy and Merkel, and later on this week with the other Euro zone members, who will need to show Draghi that they have done all they can on the political front and give him a green light to use the Bazooka, given that, this must be made clear, he is the only one who has the technical means to execute instantaneously. The method is probably the one we have discussed before: a SSB style statement saying that the ECB will not tolerate yields on certain government bonds to trade above a stated limit.
We would like to add one caveat to this. While the SSB’s methods have worked brilliantly, and just the announcement worked its magic, Draghi knows that at this late stage in the crisis he must be ready to confront the market for real if he is tested. This test will probably come at some later stage, when some hiccups will start emerging on the political front. Let us hope that this weekend will see serious and actionable decisions.