The European Central Bank (19659002) has a decade of crisis-fighting experience to counter the market turmoil in Italy, the eurozone's third largest economy.
The institution that once failed to blow the bonds Returns with hesitant purchases of sovereign debt from the affected countries have evolved into a more confident actor with a toolkit that includes a meaningful, if unchecked, defense to defend the single currency ,
The disadvantage is that Italy may be unwelcome concessions for access to this help. The rise in bond yields seemed to stop early in the Wednesday session. Here is a look at the offer, should the situation worsen
Mario Draghi was the defining moment as ECB President in July 201
Recent verbal interventions were the ECB's statement in 2016 after the vote of the United Kingdom European Union. It reminded everyone that it can provide as much liquidity as banks need it.
Outright Monetary Transactions
Under OMT, the ECB would buy large Italian bonds that cut yields and ensure that the government can finance itself. It is a powerful tool – and one that has never been used. His very creation ended the crisis of 2012.
There is a catch: the country has to apply for it and has to go to the European Stability Mechanism, the eurozone bailout. And an ESM rescue comes with conditions that require economic reform, something that Italian populists, who have won elections against austerity measures and promised higher spending, are not addressing.
"OMT is only available to countries that have an ESM program, and if Italy goes to the ESM, asks for help, and meets the requirements for a sensible policy, then it does not need help at first."
– Holger Schmieding, Berenberg Chief Economist
An advantage for Italy Ironically, with 130 percent of gross domestic product, the ECB has so much debt that it is unlikely to be immediately involved in self-imposed constraints. To avoid the charge of monetary financing, there is a limit of 33 percent on the proportion of debt a country can buy.
"The ECB still has enough leeway to buy Italian bonds – they own less than 25 percent of Italy's debt This gives them enough space to buy another 150 billion euros in debt."
– Frederik Ducrozet, senior executive Banque Pictet economist
Securities Markets Program
The SMP was a former ECB bond. In 2010, the purchase of "heavy tensions" began, hindering the transmission of monetary policy. Crucially, the ECB absorbed this additional liquidity elsewhere so as not to affect its political direction. The program ended when OMT was announced, but it shows how the ECB can develop tools tailored to individual crises.
Italy's bond yields have risen, but could be even higher if the ECB did not buy its debt as part of quantitative easing. QE was launched to revive inflation throughout the euro area, and the ECB has signaled that it will end this year. The officials can not justify extending or increasing them for just one country, which is considered to be monetary funding for the government. More QE could only be an instrument if Italy's problems affected the inflation outlook for the rest of the bloc.
"This is likely only in the event of a protracted crisis, so that it is possible, but in the near future will not occur, the ECB would want to avoid being considered political."
– Antoine Bouvet, strategist of Mizuho International
The ECB could have operational flexibility to temporarily increase some purchases as the purchase progresses or matured debt is reinvested over. Of the 30 billion euros per month QE acquisitions are on average around 3.6 billion euros Italian government bonds. Such adjustments would conflict with the spirit of their monetary policy and, in any case, the ECB is required to respect the so-called capital key over the life of the program, which ties the size of holdings to the relative size of the euro area economies
What our economists say
"The ECB's balance sheet could be anything between Italy and a full-blown credit crunch.
The ECB could reintroduce its crisis-era innovation of free lending to banks. The final program of targeted longer-term refinancing operations offered cash at a zero interest rate for four years, which could be even lower if the bank lent the money.
This liquidity tool could be useful if Italian banks are struggling to raise funds Investors, however, may not fear that the real problem is too high a public debt or a potential euro exit.
Similarly, the Bank of Italy can finance solvent lenders directly through emergency liquidity assistance at a penalty rate. This lifeline kept the Greek banks afloat in 2015 as the government bargained to rescue them.
She is double-edged. ELA is temporary and requires the regular approval of ECB policy makers. When they covered the amount Greek banks were able to obtain, the government was forced to impose capital controls.
Even Cyprus could not prevent this result, although both countries are still in the currency block. But these are minnows compared to Italy.
– With support from Jana Randow, John Ainger, Piotr Skolimowski and Alessandro Speciale
( Updates with Italian bond yields in the third paragraph. )