(Bloomberg) -- The European Central Bank just unveiled its new Transmission Protection Instrument, designed to prevent a disorderly widening of euro-area borrowing costs. 

Here’s a closer look at what it announced:

Main Aim

  • The TPI “will ensure that the monetary policy stance is transmitted smoothly across all euro area countries”


  • “The scale of TPI purchases depends on the severity of the risks facing policy transmission”
    • “Purchases are not restricted ex ante”
  • TPI is focused on public sector securities with a remaining maturity of 1-10 years
    • Purchases of private sector securities could be considered


  • ECB has four criteria
    • compliance with the EU fiscal framework
    • No severe macroeconomic imbalances
    • sustainable public finances
    • “Sound and sustainable” macroeconomic policies -- including complying with commitments under the EU recovery fund


  • Activation to be based on
    • a comprehensive assessment of market and transmission indicators,
    • an evaluation of the eligibility criteria, and
    • a judgment that the activation of purchases under the TPI is proportionate to the achievement of the ECB’s primary objective
  • Purchases will be stopped if
    • there’s a durable improvement in transmission, or
    • the ECB concludes that persistent tensions are due to country fundamentals

Creditor treatment

  • The Eurosystem accepts the same (pari passu) treatment as private or other creditors

Balance-sheet control

  • Purchases to be conducted so that they cause no persistent impact on the overall Eurosystem balance sheet or on the monetary policy stance

Other programs

  • PEPP reinvestment flexibility will continue to be the ECB’s “first line of defense”
  • ECB highlighted that the Outright Monetary Transactions, which has never been used, is also part of its toolkit

What It Means for Italy

  • In the near term, Italy’s political uncertainty is unlikely to significantly change its already-bleak economic outlook. But it does make further widening of spreads more probable, especially because the ECB is unlikely to use the tool to specifically counteract a trend prompted by government risk. At most, it might attempt to prevent spillover to the borrowing costs of other economies, like Spain or Portugal.

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