Italy borrowed 5B euros from the market today. How? They sold 1 year bonds (called bills). Although the identities of the buyers are not disclosed, it is a fair bet that most of the bonds where placed in Italy with the local banks who in turn get financing from the ECB. Incidentally, if this mechanism seems familiar, it is because Spain did the same last week.
In addition to providing liquidity to the banks, the ECB also intervened in the market buying existing Italian debt. Why doesn't the ECB buy the debt directly from Italy? Because their charter prohibits lending money to the governments directly. So the banks lend the money (via bonds) and the ECB lends to the banks by buying the same bonds, or others.
In addition, it is interesting to see that the rate of 6.09% was higher than the 4.5% Greece paid when they placed their bills. Naturally, the financial press continues to parade the myth that these rates are freely determined by buyers and sellers by continuing to report that the auctions are oversubscribed.
The truth is that neither Italy, nor Spain, Greece, Ireland or Portugal have a free functioning debt market any longer. Even if the auctions continued to be scheduled and reported the investors who used to buy these bonds are either too scared or bankrupt.
caveat emptor
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