The discretion of the European Central Bank causes debate. She had been promised, as well as flexibility, in the reinvestment of her pandemic support plan (Pepp). And it has been continued, given that in July net purchases of Italian securities amounted to 9.8 billion euros, compared with a reduction of 14.3 billion on German securities. But there is more. According to data from the institution led by Christine Lagarde, net purchases through the standard program, the Asset purchase program (App), not linked to the pandemic, also rose. Last month, plus 2.3 billion euros on Italian bonds, and plus 1.7 billion on Spanish ones. On the other hand, minus 4 billion euros for purchases from Germany, minus 3 billion for the Netherlands and minus 1 billion for France. A phenomenon that raised more than one eyebrow from Berlin to Vienna.
There is discretion and discretion. If it is true that in the context of the reinvestment of the Pepp, almost 1,700 billion euros, it is admitted and justified by the extraordinary nature of the situation dictated by the conflict in Ukraine, it is equally true that the disagreements are increasing on the use, legitimate and permitted by the Treaties, of the App program, started in mid-2014 and which includes the Targeted longer-term refinancing operations (Tltro), the special long-term refinancing operations created ad hoc to support credit in the euro area. Well, in July it decided to raise the barriers to protect the most vulnerable countries. Plus € 9.8 billion in net purchases from Italy, through Pepp. But that’s not the problem, as Lagarde has repeatedly reiterated that extreme flexibility would be used in reinvesting Pepp’s resources. But not on the App, which instead has different characteristics, objectives and technicalities from those of the emergency program.
As pointed out by financial sources behind anonymity, both in Berlin and in Vienna and in the Baltics, where inflation is in the double digits, questions are increasing about what is happening to the App. A reduction in net purchases in one country compared to another, say the chancelleries, is only functional in the case of a specific justification. Which can be either a particular level of financial stress on an exogenous basis or a condition that makes the individual country risk being ousted from the bond market. However, neither of the two basic conditions is satisfied by the current scenario. Consequently, any intervention through the App, even in the case of redemptions, can be questionable. Of course, the confirmation of this deviation can only be confirmed in a month, looking at the data for August. And it could therefore only be the result of a portfolio recalibration. But that was enough to raise the eyebrows of more than one central banker. Especially because, in the face of increasingly powerful and persistent flare-ups on prices, they often find themselves in a position to explain the dynamics of the Eurosystem at home. In other words, monetary transfers are not taking place from virtuous countries to vicious countries. Not an easy task.
The point of the ECB is that the purchases are conducted to keep the transmission capacity of monetary policy intact. In other words, to prevent – or cure, if it occurs – fragmentation within the bond markets of the euro area. An element that has convinced even the most intransigent national central bankers to support the announcement of the Transmission protection instrument (Tpi), or the anti-spread shield presented on 21 July. In other words, the second line of defense against the turbulence on the financial markets, unjustified by the economic fundamentals of the single country which is the object of the attention of the operators.
Meanwhile, the green light also arrives from Fitch, who believes that the triple line of defense of the ECB (Pepp, Tpi, Omt) is sufficient to protect the euro area. Specifically, explains the rating agency, the ECB will be able to “quickly activate the ICT if the risks of fragmentation are taking root”. In fact, as internal ECB sources explain, 48 hours may be adequate. All provided that the requesting country complies with the criteria for accessing it. For Fitch, the ECB “remains determined to avoid the level of fragmentation seen, for example, in 2011-12 or March 2020”. And this “should reduce the risk that a flare-up in yields could negatively affect debt dynamics in highly indebted Eurozone countries, such as Italy and Spain”. The appointment, for the real test for markets and for the unity of the Frankfurt Governing Council, is yet to arrive. But in the meantime, the spread between ten-year BTPs and Bund continues to benefit from the shield, closing today at 215.96 basis points, minus 9.44 points compared to the opening.