The European Central Bank (ECB) announced on Thursday a new instrument to protect the most fragile states against speculative attacks on their debt, with the markets eyeing Italy, where a period of political instability is beginning. This tool “may be activated to counteract unjustified and disorderly market dynamics that seriously threaten the transmission of monetary policy in the euro area”, according to a press release published after the Governing Council of the ECB.
Since the announcement in June of a tightening of monetary policy by the ECB, interest rates on European public debt have skyrocketed and the differential between the interest rates of the different countries has widened. The ECB speaks of the “fragmentation” of the euro zone, which hampers its objective of returning inflation to 2% and, therefore, it must be combated. Italy’s loan was trading Thursday morning at an average rate of 3.55%, or 223 basis points above the German 10-year rate, considered risk-free.
Cet écart s’est creusé à 233 points à l’issue of the press conference of the president of the ECB, Christine Lagarde, who announced a tour of the most important vis that prevu sur les taux directeurs, relevés pour la première fois depuis eleven years. On the day of this crucial monetary policy meeting for the euro zone, the ECB had to deal with the earthquake caused in Italy by the resignation of the head of government, Mario Draghi.
Without saying Italy’s name to the press, Christine Lagarde explained, however, that the Board of Governors “will not hesitate” if necessary to use the shield developed to smooth out undesirable differences in interest rates between countries. One of the main features of this program called “IPT” for “transmission protection instrument” provides for potentially unlimited debt purchases to counteract speculative attacks. The ECB “is able to do it big because of that,” the central banker said.
Calm the tensions
These purchases will target sovereign bonds maturing between 1 and 10 years, according to the press release. Criteria will be applied for a State to benefit from this system: being exempt from persecution by the EU for excessive public deficit, not presenting significant “macroeconomic imbalances”, having a debt that follows a “sustainable” path and, finally, “Solid and sustainable macroeconomic policies”. Only the Governing Council will be able to activate the IPT after “a complete assessment of the market and transmission indicators” of its policy, it adds.
Legal mine on paper, exposing the ECB to the reproach of financing States in violation of its mandate, the IPT goes hand in hand with the ECB’s objective of “fulfilling its mandate in terms of price stability”, underlines the institute. It complements two other existing tools to calm tensions in the debt market. The “PEPP” emergency program launched during the pandemic, whose stock of 1,700 million euros of accumulated debt can be reinvested with great flexibility.
And the tool called “OMT” drawn up in 2012 to be able to buy the debt of a State in an unlimited amount and provided that it already benefits from a European financial umbrella. This tool has never been used to date, its mere existence on paper has managed to contain an increase in interest rates on loans.
Source: BFM TV
