ECB Tool to Avert Debt Crisis 2.0 Takes Shape

Europe does not face fresh sovereign debt crisis, says eurogroup chief

Since the region’s last debt crisis, the EU has bolstered its bank regulation with the creation of a pan-European supervisor and crisis-fighting infrastructure through a common resolution mechanism when lenders fail. The European Central Bank has new tools to buy government bonds. Lawmakers created a recovery fund backed by common debt during the pandemic.

FT 20 June 2022

https://www.ft.com/content/e1379996-223d-463a-9c96-b660776d9207

President Christine Lagarde told euro-area finance ministers Thursday that the tool will kick in if the borrowing costs for weaker nations rise too far or too fast

“Like its predecessors, the new ECB backstop will likely face legal challenges focusing on a possible violation of the prohibition of monetary financing, the principle of proportionality, and possibly the prohibition of privileged access,”

Bloomberg 17 June 2022

https://www.bloomberg.com/news/articles/2022-06-17/ecb-tool-to-avert-debt-crisis-2-0-takes-shape-as-market-on-edge

The dangers for the eurozone are all too real

Italy is one focus of concern with its low potential growth, large deficits and enormous public debt

Designing a new facility to deal with fragmentation risk is easier said than done.

The risk of a “doom loop” is higher in Italy than in the rest of the eurozone.

ECB bond purchases need to come with conditions attached. This is how the Outright Monetary Transactions facility was designed in 2012 but no government requested it because none wanted to accept the politically fraught conditions. 

Still, in order to pass legal muster, any new facility will need to include something along these lines.

Nouriel Roubini FT 17 June 2022

https://www.ft.com/content/ed4098c6-e808-45b6-bc4d-6c7fab4deb2c