Signs are seen outside the European Central Bank (ECB) building, in Frankfurt, Germany, July 21, 2022. REUTERS/Wolfgang Rattay/File Photo
FRANKFURT/ROME, July 27 (Reuters) – The European Central Bank looks almost certain to face a test of its willingness to rein in excessive bond yields in the coming weeks as the world’s biggest debtor euro zone, Italy, is going to lead the elections that a right-wing bloc with a eurosceptic past is expected to win.
The ECB, in an attempt to ease the impact of rising borrowing costs on Italy and other southern parts of the eurozone, said last week that it would intervene in support of countries whose debt comes under market pressure through no fault of their own. Read more
With the interest premium that creditors demand from Italy rising again and the country looking at debt downgrading its debt outlook from S&P, expectations of ECB action look set to grow as the election campaign heats up and investors put a price on the economic promises of the radical parties.
SAFE HANDS NO MORE?
The collapse last week of Mario Draghi’s government – widely seen in his country and abroad as a pair of safe hands – has dampened hopes of economic change in a country where growth is low. and high debt have been established for years. Read more
Market nerves were further frayed by polls predicting that he will be succeeded on September 25 by a conservative bloc that includes one far-right party and two that have promised sharp tax cuts and have been a little openly Eurosceptic years ago. Read also : The social worker sees more anxiety and depression in the current health climate.
The rating agency S&P Global lowered its outlook on Monday on concerns about the country’s ability to meet the conditions of the European Union to secure almost 200 billion euros of funds for the recovery of the -pandemic, which could be vital amid a likely recession this winter. Read more
The closely watched spread between Italian and German 10-year bond yields rose to 248 on Wednesday, just a shade below the high hit in June when the ECB accelerated work on the new bond buying scheme, known as the Transmission Protection Instrument. (TPI). Read more
The Bank of Italy Ignazio Visco said that the current risk premium is much higher than that justified and he blamed the uncertainty of the policy for this. Read more
But he will need to convince Governing Council colleagues who include Bundesbank President Joachim Nagel, who said the TPI should only be used “in exceptional situations” – and any route into the Italian market driven by election promises it can arguably be considered self-inflicted damage.
“We suspect that the willingness of the ECB to intervene in the bond markets will be tested sooner rather than later,” said Jonas Goltermann, an economist at Capital Economics.
That test has in a sense already begun, but many analysts do not expect the ECB to step in until the Italian/German spread reaches 300 basis points or more.
“I would be very surprised if the ECB intervened below 300,” said Jens Eisenschmidt, an economist at Morgan Stanley. “They would want to err on the side of caution in terms of what could be considered justified.”
FISCAL GAP
The right-wing coalition that leads in the polls has yet to reveal its manifesto. Read also : ‘Apocalypse Now: Final Cut’, ‘Basic Instinct’ In Lineup As Streamer Studiocanal Presents Launches On Prime Video.
His two biggest parties, the far-right Brothers of Italy of Giorgia Meloni and the League of Matteo Salvini could have dropped the anti-euro rhetoric of the last decade.
But they have promised tax cuts that could reach tens of billions of euros, without specifying how they will be compensated other than by reducing access to a basic income scheme, which is likely to cover only a small portion of the gap fiscal.
All parties in the coalition, which also includes Silvio Berlusconi’s Forza Italia, have also been lukewarm on updating property values in Italy’s land registry, a reform recommended by the European Commission. but that would likely result in higher taxes for millions of people.
This could put Italy on a collision course with the EU – and therefore with investors – even before the election.
“Investors rationally demand a higher risk premium, and the ECB should allow it,” said Lorenzo Codogno, head of LC Macro Advisers and a former Italian Treasury official.
That’s what he did when a radical government supported by the League and the Five Star Movement took office in 2018, scaring investors with talks about big deficits and confrontations with Brussels.
That day Rome went back. This time the prospect of losing EU funding worth 7.6% of GDP could give his successor government reason enough to do the same.
Meanwhile, the ECB has made it clear that it retains the final say on any intervention in the TPI market – a substantial difference from the ECB’s previous emergency scheme, known as Outright Monetary Transactions.
Revealed by Draghi in 2012 when he was leading the ECB after his famous promise to do “whatever it takes” to save the euro, the OMT could only be activated if a country requested an official bailout, meaning that after everything has never been used.
“(TPI) can work because the conditions are easier than with previous programs and the size is unlimited,” said Carsten Brzeski, an economist at ING.
“It may not be something to take but rather a tool all that we want.”
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