The European Central Bank toughened its anti-inflationary stance with a 50 basis point hike to interest rates on Thursday and announced a new anti-fragmentation tool.
Details released later on Thursday showed that the tool could be used when certain countries see surging borrowing costs due to factors beyond their control, providing those countries had stuck to"sound and sustainable fiscal and macroeconomic policies."
"There is a danger that the ECB is crossing the line into financing governments here, jeopardizing its independence and setting the wrong incentives for fiscal and economic policy." "The conditions defined by the ECB that a country must fulfill in order to receive financial support from the ECB are significantly weaker than those of the OMT bond-buying program introduced during the euro crisis, which requires at least an ESM program with far-reaching conditions," Fuest added.
"The eligibility, activation and termination criterions are all open to judgment and General Counsel discretion. The timing of the announcement of the TPI has coincided with the widening of BTP-Bunds spreads on the back of heightened political instability in Italy and raises a few interesting questions," Singh said.
Singh said the key questions would be whether the ECB would act when spreads widen due to political concerns, as is the case now, and how the Governing Council would define an"unwarranted" widening of spreads. Despite the haziness surrounding the TPI's application, however, several analysts deemed it"credible" for the time being.
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