Draghi on the spread and the maneuver: why it’s important

On Thursday, 25 October, in Frankfurt, Mario Draghi, President of the European Central Bank (ECB) spoke with journalists, saying some very important things that should help to orientate himself in the confrontation between the Italian government and the European Commission on the economic maneuver and the deficit.

Draghi said:

– The tone of the controversy must be lowered, to reduce the spread and curb the financial turbulence the political counterparts must find a compromise.

The Italian question is a risk for European growth as is Brexit or Trump’s US protectionism.

– European rules on budgets must be respected.

– The euro must not be called into question.

– For the ECB, it is essential to keep monetary policy separate from fiscal policy issues. There are institutional boundaries that must never be crossed. The European Central Bank must, in fact, be indifferent to the fiscal problems of the Member States, the financing of the deficit of a single country. It can only intervene using the Omt, Outright Monetary Transactions. The Omt is the direct acquisition of short-term government bonds on the secondary market by the ECB, with the aim of avoiding the growth of tensions on the government bond market with the run of the spread and the consequent rise in interest rates.

But the Omts are not an instrument that is activated automatically. The State towards which they apply must instead demonstrate that it respects the “conditionality”: a commitment to restore its public accounts.

– Draghi also recalled that the high spread has a negative impact on growth. ECB statistics indicate that the conditions applied by Italian banks to businesses and households are already worsening. That is to say: the rates charged for those who get into debt to invest or consume are increasing. And so we invest less and consume less. “The transmission belt of the capital market between government bonds and the cost of bank financing is very fast. 

This condition is also dangerous for the banks: the credit institutions “hold the government bonds and if these bonds lose value, they affect the capital of the banks”.

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