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Home / Business / The ECB toolbox for "whatever it takes" means that Italy has to blink first

The ECB toolbox for "whatever it takes" means that Italy has to blink first



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

Verbal Intervention

Mario Draghi was the defining moment as ECB President in July 201

2, when he unexpectedly pledged to do everything possible to preserve the euro. This led to an upward trend in bond yields in the stressed southern economies, although later it was supported by a genuine instrument: Outright Monetary Transactions

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.

QE Tweaks

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


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