ECB schnabel

Italian 10-year yields were up 7 bps to 4.285% today; that compares to 1.757% in Germany. The ECB has hinted at actions to combat fragmentation but also said no new programs are needed. What they're likely to do is tilt bond reinvestments more into the periphery than the core.

  • further progress is needed on combating fragmentation
  • Market fragmentation that can impair the transmission of monetary policy
  • Calls for governments to improve public risk-sharing through a permanent fiscal tool at European level
  • We will not tolerate changes in financing conditions that go beyond fundamental factors and that threaten monetary policy transmission
  • We are monitoring current market developments closely
  • By countering fragmentation, monetary policy will contribute to our journey towards European unity
  • Monetary policy will need to respond to destabilising market dynamics
  • There can be no doubt that, if and when needed, we can and will design and deploy new instruments to secure monetary policy transmission

The thing is, who is to say what an acceptable spread for Italian debt is? Why should it be the ECB and not the market? Italy has proven for generations that it can't maintain fiscal responsibility, so why should other countries subsidize that via the currency?

EUR ticked higher on the speech but is largely unchanged. It's up 20 pips on the day to 1.0428.