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Italy’s Monetary Chief Hits Back on Market Turmoil Engulfing ECB

Italy’s Monetary Chief Hits Back on Market Turmoil Engulfing ECB

(Bloomberg) -- The day after Italy suffered the biggest-ever jump in bond yields, its central bank chief came out fighting.

Ignazio Visco, governor of the Bank of Italy since 2011 and a former chief economist at the OECD, had one mission: to repair the damage caused by his colleague, European Central Bank President Christine Lagarde, when she suggested it wasn’t her institution’s job to narrow spreads.

Visco, on a fuzzy video line from his office at Palazzo Koch, an imposing 19th century citadel next to the former Papal residence of the Quirinal Palace in Rome, suggested to Bloomberg Television that euro zone officials could “front load” bond purchases of his country’s debt if needed. Investors took the hint and Italy’s bond spread started to narrow.

Italy’s Monetary Chief Hits Back on Market Turmoil Engulfing ECB

Here’s a closer look at what the governor told Francine Lacqua at a dramatic moment in his country’s history.

Central Bank Responsibility

The Bank of Italy governor said monetary policy should ensure that markets aren’t gripped by fear and fragmentation.

“Monetary policy has the responsibility to reduce financial turbulence as much as possible and avoid the fragmentation of markets. In some countries, interest rates rise sharply and in others fall sharply because there is a flight to safer assets. But that reflects on the one hand the incompleteness of the monetary union, the lack of a safe financial activity for all. This affects some instruments, particularly some countries where there is a perception of problems with growth and public intervention. This is not OK. We need to guarantee uniform conditions for the whole euro area on the financial side. That is what is behind the program we presented yesterday.”

Interpreting Lagarde

Visco also tried to reassure investors that Lagarde’s words had been misunderstood.

“Unfortunately yesterday there was a problem with communication, but we should look at substance, and it says we will intervene, buying private and public bonds where most necessary, or where markets have uncertainties and fears over a certain period, even a longer period. We think we need to have uniform conditions as much as possible, and there are no fundamental reasons for the increase in interest rates.”

Better Understanding

The governor said that to create more uniform conditions, purchases can be skewed toward the countries that need it most, such as Italy.

“This has not been the final word. Actually, we are data dependent, we see how things proceed, how severe are the consequences of the crisis, which clearly are pretty severe in our country, but I unfortunately think that the expectations of all of us for the whole euro area are not really favorable. But then if needed, there will be more -- more action and more words. Perhaps clearer and better understood words. But this means that for the time being, the package is pretty substantial. We can front load, we can concentrate on particular jurisdictions according to the circumstances.”

Spread Fear

The Bank of Italy chief was clear that the road ahead would be uphill, but the ECB is determined to act.

“We may and are modulating our purchases as markets develop. But in the next following days, the ECB will put in place the purchases that are consistent with these 120 billions increase in the program for this year.”

“There is no question that if there are movements in the spreads caused by fears about the effects of coronavirus, this will make more difficult our provision of liquidity and the impetus we are giving to the economy.”

Credit Crunch

Visco stressed that banks need to avoid a credit crunch.

“We are studying how to ensure that the banks’ collateral is enough to get funds from the ECB, in order to avoid bottlenecks and to avoid what happened in 2011.”

For banks, it will be “very important to have a series of public guarantees that can be linked to credit moratoriums, and how much they can be used for the risk of a credit deterioration”

--With assistance from Sonia Sirletti.

To contact the reporters on this story: Alessandra Migliaccio in Rome at amigliaccio@bloomberg.net;Craig Stirling in Frankfurt at cstirling1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss

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