Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

Italy political turmoil a headache for Europe's central bank

Italy political turmoil a headache for Europe's central bank

Italian Prime Minister Mario Draghi’s offer to resign has sent unsettling ripples through financial markets, bringing back bad memories of Europe’s debt crisis a decade ago and complicating the European Central Bank’s job as it raises interest rates for the first time in 11 years to combat record inflation.
Draghi, a former ECB president, has pushed policies meant to keep Italy’s high levels of debt manageable and boost growth in Europe’s third-largest economy. He suggested Wednesday that he was open to staying in power, but the threat of political changes as borrowing costs increase have raised concerns that the 19-country eurozone could head into another crisis.

It’s a headache for the ECB as it seeks to return interest rates from sub-zero to more normal levels starting Thursday — without setting off bond-market chaos in a country with debt at 150% of economic output. The ECB has said it will raise rates a quarter-percentage point, though some analysts aren’t ruling out a half-point increase.

The Frankfurt-based ECB will join the U.S. Federal Reserve, Bank of England and other central banks worldwide that have already raised rates several times to tame runaway inflation. But the ECB doesn’t want jittery markets sending up the borrowing costs of some euro member countries beyond what’s justified by their economic strength.

The bank’s task is already hard enough with predictions growing of a recession next year due to exorbitant oil and natural gas prices fueled by the war in Ukraine.

So along with the rate increase, ECB President Christine Lagarde is expected to announce a financial backstop aimed at capping borrowing costs for governments and companies in eurozone countries that are less financially solid than the others.

It’s a hassle unique to the ECB because it oversees 19 countries that are in different financial shape but use one currency, which has plunged to its lowest level against the dollar in 20 years.

“The Fed and the Bank of England don’t have this problem,” said Maria Demertzis, interim director of the Bruegel think tank in Brussels. “The borrowing costs for each country when they issue debt is different, because the underlying outlook is different.”

The ECB’s goal is to avoid a replay of 2011 to 2012, when Italy’s borrowing costs spiked to around 7%, driven by a so-called bond-market death spiral, where rising borrowing costs raise fears a government won’t repay their debt, in turn raising borrowing costs even higher.

The vicious circle was broken by Draghi pledging as ECB chief to “do whatever it takes” to preserve the euro, followed with a promise that the bank would buy the bonds of countries facing excessive borrowing costs if needed. That backstop calmed the market so well that it never had to be used. But it came with tough conditions that might make it unappealing to governments.

The ECB’s new backstop will have conditions but probably less onerous ones. It would consist of a promise to buy an indebted country’s bonds, which drives down borrowing costs if market interest rates rise to unjustified levels.

In recent days, borrowing costs for Italy and other less financially solid eurozone countries such as Spain and Portugal have risen compared with financially solid Germany, the benchmark.

Italian 10-year bonds now yield 3.4%, about 2.2% higher than their German equivalent. Italy’s borrowing costs are not excessive at that level, but the idea is to keep them that way because market sentiment can turn suddenly.

Demertzis said that as interest rates go up, they’re transmitted differently to the borrowing costs of each country.

“So now that we are in the part of the interest rate cycle where rates are going to have to go up, the problem is that borrowing costs will accelerate for Italy and will not accelerate for Germany,” she said.

If Italy can’t borrow affordably, it could turn to the eurozone’s bailout fund, but it would be much harder to rescue than Greece was a decade ago because Italy is much bigger.

The trick for the ECB will be to reassure markets while not encouraging reckless spending by governments or violating legal restrictions on directly financing governments.

“Any sense that the ECB is dragging its feet, or that the final outcome won’t be effective enough, will see fragmentation concerns rush back onto the agenda, fanning the flames of an altogether more worrying fall in the euro,” wrote Neal Shearing, chief economist at Capital Economics.

“Ten years after Draghi’s pledge to do whatever it takes, Christine Lagarde risks repeating history. She must avoid drifting into another crisis that would ultimately require her to make a similar pledge to her predecessor,” he said in an analyst note.

Italy’s political crisis, playing out in Parliament after the president rejected Draghi’s offer to resign over a divide in the coalition government, follows 17 months of relative stability. Draghi rolled out an ambitious pandemic recovery program aimed at improving long-term economic growth — the real answer to keeping Italy’s debt manageable.

The 190 billion-euro plan backed by common EU borrowing will add some debt but is intended to more than make up for it because strong growth shrinks the size of debt relative to the economy.

Italy’s debt, second highest in the eurozone after Greece, fell 4.5% in 2021 because of the country’s strong growth rebound.

Greek debt is less of an issue, Demertzis said, because it’s mostly owed to public institutions after Greece’s three bailouts during the debt crisis — and therefore isn’t exposed to market selloffs.

Draghi’s government has begun passing recovery proposals like digitizing and improving government services and streamlining a cumbersome legal system criticized for years as a drag on businesses. It also plans to increase day-care slots so more women can enter the labor force, accelerate the transition to renewable energy and extend high-speed rail and internet to more areas of the country.

But if Draghi’s coalition breaks apart and is replaced by a government less committed to pressing ahead with the reforms, markets could begin to doubt its prospects for economic growth.
AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
Cardinal Robert Prevost Elected as Pope Leo XIV, Marking a Historic Papacy
India-Pakistan conflict may be first test for Chinese military tech
Bill Gates Announces Plan to Wind Down Philanthropic Foundation and Disperse Wealth
Historic Papal Conclave Set to Commence in Rome
“Trump Supporter” Aims to Bring a MAGA-Style Shift to Romania
Common Sense Returns to Britain's Legal System: UK Supreme Court Declares a Woman Is… a Woman
EU Hits TikTok with €530 Million Fine Over China Data Transfers
Beijing Says U.S. Is ‘Reaching Out’ for Tariff Talks Amid Soaring Trade Tensions
Warren Buffett to Step Down as Berkshire CEO After Nearly 60 Years
Trump Shares AI-Generated Image of Himself as… Pope, Prompting Outrage Reaction
Germany's Alternative für Deutschland (AfD) party has now been officially labeled “right-wing extremist” by the federal office for the so-called “protection of the constitution.”
Amazon Launches Satellite Internet Service Amidst Competition with SpaceX
Transformative Changes in Women's Wrestling: The Rise of WWE Superstars
The Rush to the White Gold: Global Investment Surge in Natural Hydrogen Exploration
This is a day in Spain without electricity and internet
Trump Administration Removes National Security Adviser Mike Waltz Amid Signal Chat Controversy
U.S. Economy Shrink in Trump’s First Quarter as Tariff Policy Raises Questions
U.S. and Ukraine Poised to Sign Strategic Critical Minerals Deal Amid Geopolitical Shifts
Spain Restores Power After Unprecedented Nationwide Blackout
Liverpool Clinches Record-Equalling 20th English League Title Under Arne Slot
How do you fix this culture?
Corrupted from Within: How Deep State Power and Unelected Judges Hijacked Democracy Against the Will of the People
President Trump and Ukrainian President Zelensky just held an impromptu discussion on the sidelines of Pope Francis' funeral in Rome.
World Leaders Gather in Rome for Pope Francis's Funeral
Pope Francis Laid to Rest in Rome as World Leaders Attend Funeral
Not Child’s Play: How Competitive Gaming Became a Global Economic Empire
California Surpasses Japan to Become the World’s Fourth-Largest Economy
Peter Navarro: The Man Behind Trump’s Tariff Madness
Former U.S. Congressman George Santos sentenced to eighty-seven months for wide-ranging fraud
Pope Francis: head of the Catholic church who pushed for social and economic justice
China do not pay these tariffs - you pay it. This is new 145% tax you pay to the US government.
Cultural Battles in the Vatican: The Candidates in the Battle for the Holy See and Pope Francis's Testament
Global Leaders Pay Tribute to Pope Francis Following His Death
Wild Chimpanzees Observed Bonding Over Alcoholic Fruit
Greek Christians Celebrate Easter in Thessaloníki
US Federal Reserve Chair Issues Warning on Tariff Impact
China, China, China!
Pope Francis Makes Brief Appearance at Easter Sunday Mass
Saudi Arabia Offers Max Verstappen Unprecedented Deal to Join Aston Martin
Global Pistachio Shortage Amid Rising Demand for 'Dubai Chocolate'
Trump is assembling a coalition of Western leaders aligned with the MAGA vision, strengthening a unified front for global change
IMF Predicts No Global Recession Amid Trade Tensions
Alphabet Faces Antitrust Setbacks as Federal Judges Rule Against Google
US Billionaires Call for Higher Taxes, but Proposed 'Millionaires Tax' May Not Achieve Desired Outcome
This is Vienna, Austria in 2025.
Designed in US, made in China: Why Apple is stuck in tariff tussle
Boeing Jet Returns to US from China Amid Tariff War
US Sets Deadline for Russia-Ukraine Peace Deal Brokerage
Italy Introduces 'Sex Rooms' in Prisons for Inmates
Italian Prime Minister Giorgia Meloni Meets with Donald Trump to Discuss EU-US Trade Tensions
×