A new headache for the ECB

Italy, the eurozone’s third-largest economy, has debt of €2.759trn – almost 150% of GDP. A crisis there would pose an existential risk to the euro.

European Central Bank (ECB) president Christine Lagarde was a synchronised swimmer as a teenager, says Jill Treanor in The Sunday Times. Now, she is “struggling to keep her head above water” as the eurozone’s periphery feels the pressure from tighter monetary policy and Italian and Spanish bond yields soar to eight-year highs.

Last week, the spread between German and Italian ten-year government bond yields spiked to 250 basis points (2.5%). That is well short of the 500-plus basis points that it reached at the height of the 2011-2012 eurozone debt crisis, but it was enough to force the ECB’s governing council to assemble for an emergency meeting in Frankfurt.

The central bankers unveiled a new “anti-fragmentation tool”. The suggestion that the ECB will act to keep spreads down “buys time”, Silvia Merler of Algebris Investments tells the Financial Times. But with details still scarce, it “does not take them out of the corner yet”.

Italy’s debt challenge

Italy – whose €2.759trn stock of debt is worth almost 150% of GDP – is the key concern, says Jérôme Gautheret in Le Monde. A debt crisis in the eurozone’s third-largest economy would pose an existential risk to the single currency.

The spike in yields leaves the Italian treasury paying interest rates of roughly 4%. For now Rome is maintaining the confidence of markets, thanks to the leadership of its prime minister, Mario Draghi, Lagarde’s predecessor at the ECB. Yet his “grand coalition” government “is showing increasingly obvious signs of running out of steam” ahead of elections due next year. “The personal aura of ‘Super Mario’ may no longer be of great help in protecting Italy from market storms.”

Comparisons with the eurozone debt crisis are overdone, say Martin Arnold and Amy Kazmin in the Financial Times. Things have changed over the past decade. Italy stands to receive €200bn in grants and cheap loans from the EU’s post-pandemic recovery fund. That will provide an economic boost worth 12.5% of GDP over five years. That help is tied to structural reforms that might drag Italy out of its long economic stagnation. The ECB also has a clearer plan for how to fight eurozone break-up risks – something it sorely lacked in 2011.

Still, the ECB’s recent behaviour doesn’t inspire much confidence, says Jeremy Warner in The Daily Telegraph. Why it is still persisting with asset purchases and negative interest rates when inflation is at 8% “is anyone’s guess”. Perhaps it is because while other central banks can just balance between the twin threats of inflation and stagnation, the ECB must also try to hold the euro together. “Europe’s monetary union is a bit like a bumblebee; aerodynamically it shouldn’t fly, yet somehow it does. For how much longer must again be in doubt.”

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