This is how the TPI works, the new ECB mechanism to fight risk premiums

The ECB already has a weapon to fight against uncontrolled risk premiums, like the one pointed out in Italy. The entity chaired by Christine Lagarde has presented this Thursday a tool approved unanimously in the Governing Council of the ECB which, for this reason, has also made it easier for the bank to raise rates by 50 basis points, instead of the 25 previously announced .

But what does the Transmission Protection Instrument (TPI) look like? “All countries are eligible”, said ECB President Christine Lagarde, “according to certain criteria. And what criteria?

It has no limitations. The scale of TPI purchases would depend on the severity of the risks facing the transmission of monetary policy. Purchases are not restricted ex ante.

Purchase parameters. TPI's purchases will focus on public sector securities (tradable debt securities issued by central and regional governments, as well as agencies, as defined by the ECB) with a residual maturity of between one and ten years. Purchases of private sector securities could be considered, if applicable.

Eligibility. The Governing Council will consider a list of criteria to assess whether the jurisdictions in which the Eurosystem can make purchases under the TPI apply sound and sustainable macroeconomic and fiscal policies. These criteria will be an input for decision-making by the Governing Council and will dynamically adjust to the risks and conditions that develop.

Criteria: compliance with the EU fiscal framework, which is now relaxed due to the suspension of the stability pact. That is, not be subject to an excessive deficit procedure; absence of severe macroeconomic imbalances; not be subject to an excessive imbalance procedure; and fiscal sustainability.

To determine that the trajectory of public debt is sustainable, "the ECB will take into account, when available, the analyzes of debt sustainability carried out by the European Commission, the European Stability Mechanism (ESM), the International Monetary Fund and other institutions, along with the internal analysis of the ECB”, says the bank.

In addition, the ECB will take into account sound and sustainable macroeconomic policies: "compliance with the commitments presented in the recovery and resilience plans of the Recovery and Resilience Facility and the country-specific recommendations of the European Commission in the fiscal field within the framework of the European Semester”, says the ECB.

Activation. The countries do not ask for it. The decision of the Governing Council to activate the TPI, “will be based on a thorough evaluation of the market and transmission indicators, an evaluation of the eligibility criteria and a judgment that the activation of the purchases under the TPI is proportional to the achievement of the main objective of the ECB", assures the entity: "The purchases would be canceled in the face of a lasting improvement in the transmission or according to an assessment that the persistent tensions are due to the fundamentals of the country"

Relationship with monetary policy. “To avoid potential interference, should the TPI be triggered, the Governing Council will address the implications of TPI purchases for the scale of the Eurosystem's aggregate portfolio of monetary policy debt securities and the amount of excess liquidity. ”, explains the ECB: “The purchases under the TPI would be made in a way that does not cause a persistent impact on the balance sheet of the Eurosystem and, therefore, on the stance of monetary policy”.

PEPP reinvestment flexibility. The ECB has also approved reinvestment flexibility for PEPPs, which is the bank's anti-pandemic program: "It will continue to be the first line of defense to counter the risks of the transmission mechanism related to the pandemic."

Direct Monetary Transactions (OMT). It is the mechanism devised in the previous crisis, associated with the stigma of having to sign a memorandum with the bailout fund, the ESM: “The UNWTO is part of the Eurosystem's set of tools. The Governing Council reserves the power to conduct UNWTO for countries that meet the necessary criteria for UNWTO.”

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