Why the ECB’s anti-spread shield could be a nightmare for Italy


Why the ECB’s anti-spread shield could be a nightmare for Italy
Written by aquitodovale

It had to be the “save Italy” shield, the anti-spread parachute to counterbalance the increase in interest rates desired by the harsh hawks of Germany, and which risks producing harmful effects for the Eurozone countries with the highest public debt. But as it was conceived, the Transmission protection instrument (TPI) launched by the ECB, rather than helping states like ours or Greece, risks triggering a new tug-of-war between countries of the South and dramatic rigor hawks like those seen in the months of the pandemic preceding the Recovery Fund.

In general, the ICTY recalls the securities purchase program launched by the then ECB president Mario Draghi (the so-called “bazooka”) in the aftermath of his “whatever it takes”: in essence, if a Eurozone country has difficulties serious to finance itself on the markets because it is unable to sell its government bonds at affordable rates (difficulties ‘photographed’ by the spread), the European Central Bank will intervene by actually buying these bonds. Draghi’s program had set a cap on purchases, the TPI of his successor Christine Lagarde has no limits. But this is good news, at least for Italy, only in part.

The problem, in fact, is that this new program will not be triggered automatically, but only for those “jurisdictions that suffer from a deterioration in financing conditions not justified by the country’s specific fundamentals”. That is, translated, for those States that have problems selling their national bonds and that respect certain criteria of stability of the accounts (the “fundamentals”).

And here comes the long hand of the tutelary deities of rigor. Yes, because the criteria chosen by the ECB to determine whether or not a country has the fundamentals to access the anti-spread aid of the ICC are four and seem to be an assist to the austerity hawks who in recent years, and until 2024, have The stop to the Stability Pact decided by Brussels with the outbreak of the pandemic is badly digested.

The criteria identified are 4. The first two concern the Stability Pact: the country that accesses the shield must not be subject to a procedure for excessive deficits or excessive macroeconomic imbalances. Now, before the pandemic, Italy was at risk of procedure due to its high public debt. The pandemic has deteriorated our debt even more, but on the other hand, with the Pact suspended, there should be no risk in this regard, at least until 2024.

The conditional is a must because in its explanatory document, the ECB adds an apostille to the first two criteria: the country, even in the absence of a procedure, must not “be assessed as not having taken effective action in response to a recommendation “Of Brussels. And what do the latest recommendations for Italy say? They say, among other things, to contain current spending already in 2023, keeping it below a growth of 0.4% compared to the previous year, and to start reducing the debt and the deficit in a gradual and credible way.

This is a very dear recommendation to hawks around the EU. “The fact that member states are now able to deviate from the Stability and Growth Pact does not mean that they have to actually do so,” German Finance Minister Christian Lindner said at the time. Now, where the Pact cannot, the ICC could.

To be even clearer, the third criterion of the ICC leaves even more discretion to the ECB: “In ascertaining the sustainability of the public debt trajectory”, or, in the Italian case, in assessing whether Rome is following the recommendations on containing spending , “The Governing Council will take into account, where available, the debt sustainability analyzes of the European Commission, the European Stability Mechanism, the International Monetary Fund and other institutions, together with the internal analysis of the ECB”.
If the three criteria set out above were not enough, the fourth and last bulwark to be overcome in order to obtain aid from the ICC is the “compliance with the commitments presented” in the National Recovery and Resilience Plans, the NRPs. What are these commitments? There are the various reforms of the land registry, public administration, justice, the labor market and competition. Not simple reforms, whose current political crisis will certainly not make them less complex to implement, quite the contrary.

As the criteria have been formulated, it is clear that the ECB is left with a large margin of ‘political’ discretion in deciding whether or not to implement the ICT for this or that country. It can be good for Italy, but also bad. All the more so if we add that the decision rests not only with President Lagarde, but with the Frankfurt Governing Council. That is, to the central banks of all the Euro countries, including the German Bundesbank, which has already thundered against a return of the “draghian” memory bazooka.

As the Welt, a German newspaper close to the positions of the rigor hawks, wrote, the ICC could help “the notorious sinners of debt”, namely Italy and Greece, making the ECB “the European bad bank, which absorbs all the junk bonds that do not they can no longer be imposed on any other investor “. This, just to understand the contours of the European debate that could await us in the coming months, and which closely resembles the pre-Recovery fund controversies.

At the time, the drama of the pandemic and the union of intentions between the countries most affected by the virus (Italy, Spain and France) won the resistance of rigorists and frugal. Now, the situation is different. And as already mentioned, the Italian political crisis does not help. This is the opinion of some analysts, such as Fabrizio Santin, Pictet’s senior investment manager, according to whom, the strict criteria set by the ECB for the ICT, could transform an instrument created to contain the spread into a sort of stimulus to speculation on the securities markets and therefore to the increase of the same spread: “The risk – he tells Ansa – is that, in the light of recent political events in Italy, the financial markets will go to test the determination of the ECB to contain the widening of spreads”. to verify if Lagarde is really ready to repeat Draghi’s example of “whatever it takes”. Or if she does not have the strength, also due to the absence, in Italy, of “a” Draghi able to stand up to the hawks in Europe.


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