ECB’s ‘anti-fragmentation’ measure comes at the right time for Italy
When the European Central Bank releases its first interest rate hike in more than 10 years on Thursday, it is also expected to provide details of a measure it hopes will halt soaring borrowing costs for some countries, triggering a new debt crisis in the euro area.
Political unrest in Italy, which could peak on Wednesday, could accelerate its deployment. And embolden his detractors.
Highly indebted countries such as Italy and Greece have seen their government bond yields rise in recent months as soaring eurozone inflation forced the ECB to signal that the era of ultra monetary policy -accommodating is coming to an end. The strategy included a number of market intervention tools designed to remove these borrowing costs.
The spread between German 10-year bunds TMBMKDE-10Y,
the regional benchmark and Italian bonds of equivalent duration TMBMKIT-10Y,
widened from around 100 basis points a year ago to 204 basis points. The similar spread for Greece TMBMKGR-10Y,
over the same period rose from around 100 basis points to almost 216 basis points.
ECB President Christine Lagarde said she considers some of these spread expansions to be unwarranted – a “risk of fragmentation” that needs to be countered. It is the details of how the ECB will proceed that are expected to be revealed on Thursday.
UBS analysts believe the anti-fragmentation tool will differ from previous eurozone-wide market intervention mechanisms by being country-focused and open. It can be “ad hoc and have no initial quantitative limits…and as such provide the ECB with a good degree of flexibility and discretion in its market interventions,” the Swiss bank said.
The prospect of the new tool has already helped the Italy-Germany spread contract from the high of 240 basis points reached in mid-June.
But it remains high as investors consider the prospect that former ECB President Mario Draghi will have to resign as Italian prime minister on Wednesday if he fails to reconcile the recalcitrant members of his coalition.
Draghi is deemed fiscally responsible by the markets and the prospect that he will no longer have his hand on the helm will increase concern over Italy’s sovereign debt.
“Political developments in Italy do not help in this regard. If they trigger a political crisis, it will be a clear signal that the new tool, based on conditionality, will not be designed to properly deal with political developments evolving in the market,” the rate and currency research strategists said. from Bank of America.
And the confluence of another ECB support mechanism and political shenanigans in Rome is not lost on the most fiscally responsible members of the euro zone who decry any central bank intervention in the market that accompanied by economic reforms.
A Reuters report on Tuesday, citing sources with direct knowledge of ECB talks, said any aid would be conditional on the recipient adhering to euro zone fiscal rules.
“Anyone who wants money from the central bank in turn has to be prepared to provide something in return,” said Lars Feld, adviser to Germany’s finance minister, according to Reuters.