Jul 21, 2022
Here’s a Closer Look at the ECB’s New Anti-Fragmentation Tool
Bloomberg News
,
(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”
Purchases
- “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
Eligibility
- 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
- 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.
©2022 Bloomberg L.P.