JPM Sees "Opportunity" For ECB In Italian Gov't Collapse

JPMorgan writes ahead of the ECB meeting that while the collapse of the Italian government could make decisions on the anti-fragmentation tool harder, "it also offers one important opportunity".

• JPM has assumed the new tool will be based on conditionality linked to European surveillance processes, and that all member states will be seen as eligible for support, ending only when European institutions indicate that a country has become noncompliant.
• The ECB "will independently decide on a yield/spread target and stick to this until it receives guidance from European institutions that a change in fundamentals is occurring in a country. Having received such a signal, the ECB adjusts its yield/spread targets independently. In other words, the ECB would not be making changes to its targets in high frequency without external guidance. We also assume that the targets will not be made public."
• So, "the opportunity created by the current situation is about timing. The ECB can set a higher yield/spread target for Italy from the start to take into account the government collapse and it can also toughen up some of the conditionality before launching the programme."
• All in all, the Italian political crisis has "raised the stakes" for the ECB to lay out a credible strategy for addressing "unwarranted" fragmentation - "Italian politics has likely raised the hands of the hawks and hence Lagarde’s statements will be watched even more closely."