Without the ECB, Italy would have left the Eurozone – Natixis

The ECB’s interventions have led to a tightening of the long-term yield spread between Italy and Germany. A statistical analysis suggests that without the ECB’s intervention, today’s Italy/Germany yield spread would be 400 basis points, compared with around 170 basis points for the actual spread, economists at Natixis brief.

Key quotes

“The ECB’s bond purchases have driven down risk-free long-term interest rates in the Eurozone, leading investors to rotate into riskier bonds, including those of Italy. In addition, the ECB (via the Bank of Italy) is buying Italian bonds directly and, under the PEPP program, is even able to overweight Italy in its purchases. All this has led to a tightening of the yield spread between Italy and Germany.”

“The yield spread between Italy and Germany usually depends on the gap between the public debt ratios of Italy and Germany, the potential growth gap between Italy and Germany (potential growth determines the capacity to reduce the debt ratio and the gap between the current account balances of Italy and Germany.”

“Without the ECB’s interventions, the 10-year yield spread between Italy and Germany would now be 400 basis points. Italy would be borrowing at 3.6%, which would lead the interest payments on its public debt to rise by 3 percentage points of GDP and to the impossibility of maintaining fiscal solvency.”