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ECB spent billions to shield Italy from market turmoil

ECB spent billions to shield Italy from market turmoil

The move is the ECB's first line of defence to shield debt-loaded Southern European states from market turmoil
European Central Bank chief Christine Lagarde
European Central Bank chief Christine Lagarde
Photo credit: Philipp von Ditfurth/dpa

European Central Bank officials appear to have deployed billions of euros in bond purchases to shield Italy and other southern euro members since activating their first line of defence a month ago to keep speculators at bay. 

Data released on Tuesday points to a significant use of funds freed up by maturing debt in the portfolio of its pandemic program, suggesting the use of a tool crafted by policy makers as an initial response to any market turmoil. 

The statistics, available only on a two-month basis, show net holdings in German, French and Dutch bonds dropped by 18.9 billion euros through July. Net purchases of debt from Italy, Spain, Portugal and Greece totalled 17.3 billion euros.

The numbers are the first hard data revealing the ECB’s intervention in debt markets after a blowout of bond yields in June forced President Christine Lagarde to convene an emergency meeting where officials agreed on the need to respond. 

“It appears that the ECB has already activated its first line of defence,” said Christoph Rieger, head of rates at Commerzbank AG. “This is by far the largest reduction in German holdings since the ECB started quantitative easing, and more than we expected.”

As an initial step, policy makers agreed to be flexible in reinvesting redemptions coming due in their 1.66 trillion-euro pandemic-era asset-purchase program. 

To organise bond buying, they divided the euro area into three categories: donors including Germany, France and the Netherlands, recipients consisting of Italy, Greece, Spain and Portugal, and so-called neutrals.

Lagarde has described that flexibility as the ECB’s first line of defence against volatility in markets that threatens the transmission of monetary policy, with a newly created debt-purchase tool in the background in case bolder interventions become necessary.

Italy has been in the focus of investors since before Prime Minister Mario Draghi’s government collapsed last month and put elections onto the agenda for late September. 

©2022 Bloomberg L.P.

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