Chitaly Starts to Mambo Italiano – China in Talks To Buy Italian Sovereign Debt?

I mentioned this possibility over a month ago on August 5th, in the story “Chitaly – China to Purchase Italian Sovereign Debt?” Headlines just hit that Italy is in talks with China to directly buy Italian bonds according to the FT. This headline caused an immediate lift to depressed markets which is quickly getting faded. I believe this may actually transpire because it accomplishes two aims. Most clearly, it helps Italy fund its sovereign debt, which they had some trouble doing today as evidenced by the 1-YR note auction going for 4.15% this month vs 2.96% last month. Secondarily, China is desperate to maintain the euro, because this is the only other major currency which has the potential to be investible for large quantities of FX reserves. To the extent that China runs a current account surplus with Europe in the future, having the euro in existence as well as deep and liquid sovereign debt markets would be advantageous for China. The interest rate on Italian 10-YR debt is a full 350+ bps over the US 10-YR. While some will be dismissive of this headline, there are some symbiotic merits and developments along these lines bear careful monitoring this week.