New ECB tool fails to impress as Italy faces political paralysis

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ECB, the misfortunes of Italy

US dollar and euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

A new tool from the European Central Bank to protect indebted states from soaring borrowing costs failed to impress investors on Thursday, with many worrying about a lack of detail and terms that could make it difficult for people to use it. societies like Italy.

Unveiled alongside its first interest rate hike in 11 years, under the Transmission Protection Instrument (TPI), the ECB will buy bonds from countries whose borrowing costs relative to Germany , according to her, will soar through no fault of their own.

For markets, the most pressing need for the TPI is Italy, which this week saw the collapse of its government after the resignation of Prime Minister Mario Draghi, putting the second most indebted member of the eurozone on the path early elections.

Italian markets signaled unease, with bond yields rising and the closely watched spread between Italian and German borrowing costs reaching levels that in June prompted the ECB to begin work on an “anti-fragmentation” tool. “.

Danske Bank chief analyst Piet Christiansen said the tool seemed “heavy” and “not as easy to activate as markets had probably hoped”.

“That’s why the markets are punishing Italian bonds as they are now, simply because it’s unclear when and how the ECB will intervene,” he added.

To be eligible, a country must comply with the currently suspended European Union fiscal rules, not face serious macroeconomic imbalances, its finances must be considered sustainable, and it must have compliant “sound and sustainable macroeconomic policies”. plans submitted to the EU for its COVID-19 Recovery Fund.

Sources told Reuters after the ECB’s announcement that all eurozone countries were eligible based on the conditions.

But Christiansen noted that may not be the case in the future, depending on what a new Italian government looks like.

In 2018, a clash between a populist new government in Italy and the EU sparked a massive sell-off of Italian bonds.

The ECB wants to prevent borrowing costs in weaker states like Italy from rising too steeply so it can raise rates to tame inflation without worrying about the risks of fragmentation.

Rolling out the tool was at its discretion, Lagarde said, and the ECB can adjust the criteria.

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