The new TPI anti-spread shield baked by the ECB by Christine Lagarde will it really be able to lock Italy, among other things, in the midst of yet another political chaos and now orphan of the Draghi shield, from market speculation? Speculation that could crash against the made in Italy assets, BTP first just in view of the early elections on September 25th?
Barclays economists, but not only, disagree.
In the cauldron of the various reflections unlined by the world of economists, strategists and various analysts, there are also those who publish a severe observation not so much towards Italy, but of the same ECB. E’ Brian Swint, who posted on Barron’s website the article entitled “Why ECB Rate Hikes Risk Breaking the Euro—and Europe”. Or “Why the ECB rate hikes risk breaking the euro and Europe”.
Indicative is the fact that, a few hours from resignation of Mario Draghi, si returned to talk about #Italexit, and not only on Twitter but also, and this is certainly more serious, on the markets, referring to how traders are trying to protect themselves from the risk of a Eurosceptic government.
But let’s get back to TPI anti-spread shield, which Lagarde’s ECB announced yesterday. Is it really a shield capable of protecting Italy?
So Silvia Ardagna of Barclays, in her comment “ECB Watching: Full discretion with strict conditionality”that is to say “Looking at the ECB: full discretion with severe conditions”.
The title is almost enough to summarize the DNA of the shield that Lagarde called from the beginning “Tool against the fragmentation of the euro area” not being able, for obvious reasons, to speak of an anti-spread shield or save-BTP save-Italy:
“In our view, the TPI at the moment it cannot be activated to lock down Italian assets from market pressures “, they write from the top floors of the British bank.
Reason?
“According to the press release, purchases of government bonds (more generally government bonds) on the secondary market can only be made (in fact) for those countries that fully meet the established criteria, in jurisdictions that are facing a deterioration in conditions that is not justified by the country-specific fundamentals, in order to counter the risks affecting the transmission mechanism (of monetary policy) “.
Barclays points out that the fact that “The deterioration should not be due to the specific fundamentals of a country, in fact it excludes Italian bonds, therefore BTPs in general, from purchases, at a time when Italy is facing political uncertainty among other things” destined to last.
Silvia Ardagna explains that “We consider political uncertainty as a country-specific fundamental “. Is that “However, even in the case of a less rigid interpretation, the increase in Italian rates will continue to be fast while the ECB will continue the path of normalization of monetary policy, and at the same time there will continue to be political uncertainty. Consequently, the bar for the activation of the TPI will be even higher ”.
Moreover, “The president of the ECB also indicated the existence of the OMT as a tool to deal with the increase in interest rates (in this case BTP rates) of a specific country”.
In short, for Barclays the ECB TPI shield, at least for Italy, would really be of little use, as first of all it cannot be activated.
Market expert Holger Zschaepitz, who writes on Twitter that “The #BCE has finally joined the club of central banks that are raising rates” but that “its anti-fragmentation tool called TPI still fails to convince the markets “.
Recall that the TPI is one instrument without ex ante limitations, but that its activation will be possible only if the country that will need it respects four conditions:
1) The tax rules of the European Union. 2) The absence of serious macroeconomic imbalances. 3) Fiscal sustainability, therefore sustainability of the debt trajectory 4) The presence of solid and sustainable macroeconomic policies.
The conditions they seem to be a halt to the populists not only of Italian politics but of all euro area member countries:
meanwhile, the ECB will decide whether or not to activate the ICC. Second, as Lagarde said, “We are not a hostage to anyone”. Which means that the shield cannot be activated without those four conditions being met.
What should the ECB’s ideal anti-spread shield look like as a result?
Barclays writes that “If the ECB wants this tool to be credible, denying those who believe that the bar for its activation is high, it could use this tool to protect countries like Portugal, Spain or Greece, in the event that the respective spreads widen significantly faster than those of the core countries, due to the contagion effect of Italian political dynamics, and while interest rates are being raised“.
Barclays presents its interest rate outlook in this context:
“Based on these considerations, we – continues Ardagna – we reiterate our estimates on the (ECB) meetings in September and October“. Consequently, “we expect the ECB to raise rates by 50 basis points and 25 basis points respectively, and we will see the deposit rate at the end of this bullish rate cycle at 75 basis points.”
“The risk to our baseline scenario has two sides – concludes the note from Barclays – If the outlook deteriorates as we expect, but inflation persists for longer than our estimates, the ECB could raise interest rates by an additional 25 basis points in October or raise rates by another 25 basis points in December. , bringing the deposit rate to 1%. But the ECB could also raise rates by 25 basis points in September (therefore not by 50 basis points), in the event that the deterioration of the outlook is faster or the activation of the TPI proves difficult to achieve “.
In this context characterized by the fear of a new sovereign debt crisis, there are also those who do not spare warnings to the ECB itself of Christine Lagarde, which has shown itself to be much more hawkish than in the past in its determination to fight against inflation.
The president of the European central bank has in fact said that, in order to blunt the boom in inflationary pressures in the euro area, new monetary tightening will be necessary in the coming months, even if economic growth is already slowing, in the face of an outlook in which the the only certainty is uncertainty.
The economist Paul De Grauwe, Belgian economist and professor at the London School of Economics and Political Science as head of the European Institute – does not however share the hawkish approach of the ECB and this is because, in addition to the worst inflation of the last 40 years and moreover, the Eurotower must also avoid, precisely, the encore of a sovereign debt crisis in the euro area.
De Grauwe points out that, following the announcement of the 50 basis point monetary tightening, the first since 2011, 10-year BTP rates rose to around 3.6%, compared to 1.2% for 10-year Bund rates. , which remained almost unchanged, consequently causing the BTP-Bund spread to rise to 240 basis points, a significant difference between Italy’s borrowing capacity compared to Germany’s.
According to the economist, this spread risks opening the same Pandora’s box that triggered the euro crisis in the years 2010-2012. For Paul De Geauwe, the truth is: “If you don’t want a sovereign debt crisis, you don’t have to fight too hard with inflation.” But the Germans, we can bet, will not like the advice.