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Global Economy

The ECB and its Italy problem

For many market observers, the recent drop in risk premiums on Italian government bonds compared to German government bonds was a bit of a mystery. The so-called spread had temporarily reduced from just under 2.5 percentage points to around 2.1 percentage points in the past few weeks.

Ten billion euros for Italian bonds

It now seems clear that the European Central Bank (ECB) was primarily responsible for this. According to a report by the Bloomberg news agency, the currency watchdogs led by Christine Lagarde have apparently made billions in bond purchases to support Italy, Greece, Spain and Portugal.

Overall, the net purchases of bonds from Italy, Spain, Portugal and Greece then amounted to 17.3 billion euros. The ECB is said to have spent 9.8 billion euros on the purchase of Italian bonds alone.

ECB activates first line of defense

"It is quite possible that the spread has become too high for the ECB, so that it was forced to intervene. It could also signal to the market that it has a hand in the game and is ready to act," comments Commerzbank foreign exchange analyst Antje Praefcke on request from

The ECB is likely to have used the instrument that the central bank intended as the first reaction to market turbulence: the pandemic program, or PEPP for short in central banker jargon, is the ECB’s first line of defense against interest rates drifting apart in the euro area.

New anti-fragmentation tool

A sudden increase in the spreads, i.e. the risk premiums, of Italian government bonds compared to German Bunds had forced ECB boss Lagarde to convene an emergency meeting in June. She had announced a new crisis instrument that should counteract the fragmentation in the euro area.

Two weeks ago, this was then officially presented at the press conference after the ECB Council meeting: It is called the Transmission Protection Instrument – TPI for short.

TPI enables higher interest rates – in theory

This instrument is intended to prevent interest rates on government bonds from drifting too far apart between the individual countries in the euro area. TPI enables targeted and, above all, unlimited bond purchases by individual highly indebted countries, thereby reducing their financing costs.

"The TPI represents a way of calming the market so that even highly indebted countries can cope with higher key interest rates. However, doves continue to dominate the Governing Council of the ECB. The representatives of the highly indebted countries are likely – TPI or not – to continue to expect low key interest rates in the future urge," explains Commerzbank analyst Praefcke.

Economists criticize vague criteria

The Governing Council of the ECB decides whether a country can make use of the crisis instrument. He has named various conditions for this, which basically relate to a solid budgetary policy and a sustainable macroeconomic policy of the countries.

However, these are quite vague and broad, as economists complain. "The ECB has set the bar very low for the application of the TPI," says foreign exchange expert Praefcke.

New Italian elections are causing tension

It is therefore quite possible that TPI will soon have its first appearance. After all, Italy continues to be the focus of bond investors. The country is – once again – in the midst of a political crisis following the resignation of Mario Draghi as prime minister. New elections are scheduled for September 25th. A lasting calm on the bond markets is not to be expected in advance.

Even beyond September 25, things should remain exciting with a view to Italy. The experts at Helaba are skeptical that it seems unlikely that an agreement across party lines will be reached again. However, the bond market is not yet reflecting a sovereign debt crisis 2.0 or even an "Italexit", i.e. Italy leaving the European currency area.

Spread Italy-Germany still increased

However, it is also a fact that the Italy-Germany spread is still at an elevated level of around 220 basis points even after the intervention of the ECB. For comparison: In the summer of a year ago, it was still leveling off at between 100 and 120 basis points.

"In view of the uncertainty about the criteria for the TPI, the market could test the willingness of the ECB to use it," says Jari Stehn, European economist at US investment bank Goldman Sachs. This is especially true in relation to Italy.

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