–Italian officials express relief over ECB moves to limit spread widening
By Silvia Marchetti
ROME (MaceNews) – Italy’s ruling coalition is pushing hard for the European Union to launch a new recovery fund aimed at jointly funding measures to cushion the impact of energy and inflation spikes on families and firms, in an attempt to avoid a further blowing up of spreads, according to officials.
Meanwhile, Italian officials breathed a sigh of relief on Wednesday when the ECB governing council appeared to promise new measures to limit rising borrowing costs in Italy and other peripheral economies. In a statement issued after an emergency meeting, the council said it will “apply flexibility in reinvesting redemptions coming due in the PEPP portfolio” to address the fragmentation issue and improve monetary policy transmission.
According to sources familiar with ECB thinking, ‘flexibility’ could entail slightly increasing the purchase of certain country bonds under spread pressure, for instance Italian securities, through German bonds redemptions falling due. This might end up changing the capital key, the share of state securities the ECB is allowed to buy within the purchase program.
“This would mean to slightly alter the share of purchased assets of a specific country and give preference to those most facing a spread flareup, which is a move that must be carefully honed as it could clash with existing monetary policy rules and lead to disputes between central banks and the ECB, as already happened with the Bundestag,” added the source.
Italian officials are confident the ECB will calibrate its monetary response to shield south European spreads, particularly Italian bonds which have been the worst-performing among those of peripheral Mediterranean countries.
“Our spread is higher than that of Spain and Portugal, and this is a sign of prolonged volatility which must be dealt with,” said a 5 Stars Movement deputy.
For its part, Rome is working to gather support across the European Union to create a new joint debt tool, similar to the one deployed to finance direct EU pandemic aid, at the upcoming meeting of the European Council on June 24, to unite heads of state and leaders.
“We can’t keep financing new measures against energy spikes through national deficit spending, which just piles up more public debt and adds pressure to the spread. Given the whole of Europe faces the same issue, there should be some centralized funding, a burden-sharing approach,” said a source.
Rome’s activism on the EU stage follows a record rise in the spread in yield between Italian and German 10-year bonds which widened by 40 basis points after last week’s decision by the European Central Bank to start unwinding its super accommodative monetary policy of asset purchases and ultra-low rates.
“Draghi’s reputation and leadership aren’t enough in keeping the spread under control, it is a crisis that involves the entire Eurozone and for which the ECB, and other EU institutions, are called to do their part with ad hoc measures that shield from a spread emergency,” argued a Democrat source.
At the beginning of June, the spread between Italian and German bonds reached a record of 214 basis points, the highest level since 2000, also due to mounting market uncertainty over the outcome of the next general election next year.
In past days the coalition has been mulling whether to further raise deficit spending to cut down on soaring energy costs for households and firms triggered by the Russian invasion of Ukraine but ruling parties are now buying time, holding their breath for a coordinated EU action.
“With the protracted conflict and rising inflation, a new EU-wide recovery fund is paramount to finance measures against rocketing prices and energy bills in each single member state. How such potential funding could be done, is still to be evaluated but we must reach a political deal among peer countries by this summer”, said an official.