May 22, 2018 / 2:14 PM / a year ago

Graphic: Little evidence that ECB would use Quantitative Easing to play politics

FRANKFURT (Reuters) - Rumors are rife that the European Central Bank may use its regular bond buying to sway the program of the new Italian government, but past data provides little evidence it uses these purchases to intervene in times of political turmoil.

FILE PHOTO: European Union flags flutter outside the European Central Bank (ECB) headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach/File Photo

Italian bond yields have risen sharply on fears that a populist government will clash with Brussels over spending plans, and some have suggested the ECB may have reduced purchases recently to send the new government a signal about discipline.

Traders see little evidence of this for now, and Italian spreads over Germany actually narrowed on Tuesday, suggesting that investors’ nervousness may be calming as the new government provides clarity over its plans.

To view a graphic on ECB QE purhcases in key countries, click:

While sources at the ECB suggest they are only mildly concerned about Italy for now, bank officials have in the past argued that these purchases could indeed be used to reverse sharp market moves, particularly around major events including elections or referenda.

But such buying would have to be temporary over a course of only days as the ECB has no mandate for or interest in countering a fundamental shift in market sentiment, justified by a clear change in investors’ risk perception.

Indeed, monthly data does not suggest changes in the ECB’s bond purchases around key political events.

To view a graphic on ECB's Italian bond purchases as a portion of QE, click:

Traders in the past suggested that the ECB may have sought to soothe the market before France’s presidential election in April last year.

Data shows France’s share of the ECB’s purchases did slightly increase in the six months up to the vote but that trend continued even after Emmanuel Macron won the keys to the Elysee.

Figures also show little deviation before Italy’s 2016 constitutional referendum or Catalonia’s independence referendum last October, suggesting that even if the ECB chose to smooth market fluctuations, it did it quietly and only temporarily so monthly data would show no trace of intervention.

To view a graphic on Italian bond spreads vs Germany, click:

While ECB officials have publicly defended the ECB’s role in jumping into markets to ease liquidity crises, they have also rejected calls to help individual countries in times of broader economic difficulty.

Such help could only come if a euro zone member formally entered a macroeconomic adjustment program under the European Financial Stability Facility/European Stability Mechanism.

The ECB declined to comment on market rumours about its recent Italian purchases.

Reporting by Balazs Koranyi and Francesco Canepa; Editing by Hugh Lawson

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