MNI: ECB TPI Assumption Supports Bonds-Italy, Greek Officials

Eurozone bond investors seem to be confident that the European Central Bank would buy bonds in a crisis, but rising longer-term yields point to concerns over a permanent shift to higher inflation and intractable deficits, Italian and Greek treasury officials told MNI.

While France’s debt woes have contributed to upwards yield pressure, Europe’s institutional architecture has evolved since the 2011-12 debt crisis and contagion is less likely, the officials said.

“The distinction between core and periphery is fading,” the Greek official said, pointing to the ECB’s Transmission Protection Instrument bond-buying facility and adding that “investors don't doubt that the ECB or the EU would step in the case of an unwarranted dysfunction in European sovereign debt markets.”

ECB officials stress in private that the bar to using TPI would be very high.

ECB DEPOSIT RATE

Meanwhile, relatively low ECB interest rates are helping to suppress yields at the short end of the curve, the Greek and Italian officials noted.

“The short-term rates could help to boost the economy … but the issues on longer bonds show that investors see a future where debt sustainability seems harder and more inflationary in general,” the Greek said.

Germany’s defence and infrastructure spending drive, and its move away from debt-brake constraints, has been a significant driver of bond markets this year, with the Italian official pointing to a potential “nightmare scenario” for the eurozone of higher inflation and persistent deficits. (See MNI INTERVIEW: Germany Needs Favourable EU Fiscal Treatment)

Both Italy and Greece support the creation of a joint European asset, which could lower borrowing costs across the bloc and deepen the pool of liquidity in the Eurozone’s sovereign debt market, the officials said.