Italy Bond Spread Will ‘Absolutely’ Focus ECB, Makhlouf Says

(Bloomberg) — Italy’s bond-yield spread over peers will keep European Central Bank officials on alert, Governing Council member Gabriel Makhlouf said.

(Bloomberg) — Italy’s bond-yield spread over peers will keep European Central Bank officials on alert, Governing Council member Gabriel Makhlouf said.

The Irish governor, speaking in an interview on Wednesday at the International Monetary Fund meetings in the Moroccan city of Marrakech, said that he and his colleagues do have the tools to contain any problems should they occur.

“What’s happening in Italy is both about the market views of domestic tail risk of policy, and also a relative view of Italy against other countries,” he said. “It’s absolutely something that we, the ECB, will be very focused on.”

Italy has drawn the attention of investors ever since a botched attempt to tax banks was followed up by a budget from Giorgia Meloni’s government that Fitch Ratings has just described as a “significantly loosening” of its plans.

IMF fiscal official Vitor Gaspar — a former Portuguese finance minister — said Wednesday that the country needs “additional ambition” to curb its debt burden. 

For ECB officials, Italy has long been a worry. Last year, they devised a new crisis-fighting tool that would allow them to raise interest rates while containing any bond-market flare-up.

“Part of our job is to make sure that monetary policy is transmitted across the whole of the euro area,” Makhlouf said. “If something gets in the way of that, you know, we’re concerned about it” though “I also think that we have the tools to manage that ourselves,” he added.

Speaking separately to Bloomberg, Croatian central bank Governor Boris Vujcic said Italy doesn’t need the ECB’s new crisis instrument at the moment.

“The spreads are widening, but not too much,” he said. “If you look at the change of budget projections, it’s something that could have been expected.”

Vujcic’s Belgian counterpart, Pierre Wunsch, also played down the significance of events in Italy — saying they shouldn’t influence a debate on whether to halt reinvestments of pandemic bond purchases before a planned end-2024 cutoff.

“We need to think about a world where we’re going to stop PEPP reinvestment,” he told Bloomberg TV Thursday. “I don’t want to be in a situation where stopping a bit before or a bit later makes a huge difference, because that would mean that we have a problem.”

Asked about Italian bond spreads, European Union Economy Commissioner Paolo Gentiloni said the current level isn’t a worry.

“I think that we have increasing interest rates all over the euro area so the spreads that we Italians know very well because we follow the spreads are not a particular matter of concern,” he said. “What is important I think for all member states is to keep prudent fiscal policies.”

While the Meloni government isn’t reckless, its actions may have stoked investor concerns, Makhlouf observed. 

“My sense is that the markets are worried that the government’s spending too much,” he said. “I think the markets have been spooked by the windfall bank tax because that came out of nowhere.” 

That measure then faced so many adjustments “that it casts the doubt on the efficiency and effectiveness in policymaking, which doesn’t help confidence,” said Makhlouf, who is a former senior official at the New Zealand and UK Treasuries.

The Irish governor added that he reckoned things will settle down in bond markets, though such an outcome is hard to see at the moment as the world adjusts to the reversal of decades of relative calm.

On the ECB’s monetary policy itself, Makhlouf said officials won’t hesitate to increase borrowing costs if they need to, with December the next key meeting.

“If we need to raise rates again, we will raise rates again, and if the data starts to go the wrong way, we will raise rates again,” he said. “When we get to the December projections we’ll have a better feel.”

–With assistance from Alexander Weber, Jana Randow, Francine Lacqua and James Regan.

(Updates with Gentiloni starting in 12th paragraph.)

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