The toolbox of what is needed from ECB means that Italy should blink first



The European Central Bank has a decade of experience in the fight against the crisis to cope with the market turmoil in Italy, the third largest economy in the euro zone.

The institution that once failed to stop a burst of bonds yields with tentative purchases of sovereign debt from the affected countries has become a more self-confident actor with a toolbox that includes significant support, although not proven, to defend the single currency.

The bad thing is that Italy could have inconvenient concessions to access this badistance. The increase in yields on the nation's bonds seemed to stop, at least for now, at the beginning of Wednesday's deal. Here's a look at what could be offered if the situation gets worse.

Verbal intervention

Mario Draghi's decisive moment as president of the ECB came in July 2012 when he unexpectedly committed to doing "whatever it takes" to preserve the euro. That slowed the yields of the spiral bonds in the stressed southern economies, although later it was backed by a real tool: Direct Monetary Transactions.

The most recent verbal intervention was the declaration of the ECB in 2016 after the vote of the United Kingdom to leave the European Union. He reminded everyone that it can provide as much liquidity as banks need.

Total monetary transactions

Under UNWTO, the ECB would make large-scale purchases of Italian debt, reducing yields and ensuring that the government can finance itself. It is a powerful tool, and it was never used. Its mere creation put an end to the crisis of 2012.

There is a trap: the country must request it, and it must also resort to the European Stability Mechanism, the rescue fund of the euro area. And an ESM rescue comes with conditions that require economic reforms, something unlikely to attract the Italian populists who won the election cursing against austerity and promising greater spending.

"OMT is only available for countries that have an ESM program If Italy goes to the ESM, asks for help and meets the conditions to apply sound policies, then there would be no need for help to get started."
– Holger Schmieding , chief economist at Berenberg

One advantage for Italy, ironically, is that it has so much debt – 130 percent of gross domestic product – that it is unlikely that the ECB will immediately incur self-imposed restrictions. To avoid accusations of monetary financing, it establishes a cap of 33 percent on the part of the debt of any country that can buy.

"The ECB still has ample scope to buy Italian bonds: they own less than 25 percent of Italian debt, place them comfortably below the issuer's limit to have room to buy another 150 billion euros in debt. "
– Frederik Ducrozet, senior economist at Banque Pictet

Securities Markets Program

The SMP was a previous bonus from the ECB- The purchasing program started in 2010 to address the" serious tensions "that hinder the transmission of the monetary policy. Fundamentally, the ECB absorbed that additional liquidity elsewhere to maintain its unaltered political stance. The program ended when UNWTO was announced, but it shows how the ECB can invent tools adapted to individual crises.

QE Adjustments

Yields on Italian bonds have soared but could be even higher if the ECB were not buying its debt as part of quantitative easing. However, QE was created to reactivate inflation throughout the euro area, and the ECB has signaled that it will end this year. Officials can not justify extending or increasing it only for one country, which would be considered a monetary financing of the government. More QE could be a tool only if Italy's problems damage the inflation outlook for the rest of the bloc.

"This is only likely in the case of a prolonged crisis, so it is possible but unlikely to materialize in the short term, especially since the ECB would like to avoid being seen as a politician".
– Antoine Bouvet, strategist at Mizuho International

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