MNI: ECB's Ongoing Liquidity To Aid Italy Even Past APP End

--QE Termination 'Not Really The End' Of Financial Support To System

--Liquidity Parachute Weathers Instability Risks: Taddei

By Silvia Marchetti

     ROME (MNI) - The termination of the European Central Bank's asset purchase

program will not mark the passing of a period accommodative policy, as elevated

liquidity levels will continue to be fully guaranteed, helping protect Italy's

economy from current political risks, Filippo Taddei, a former economic adviser

to the Democrat party and aide to former premier Matteo Renzi, told MNI.

     Taddei, now Professor of International Economics at Bologna's John Hopkins

School of Advanced International Studies (SAIS), argued that the end of the APP

"will not really be the finishing line" for boosted liquidity supply to the

financial system but just the transition to a slightly different monetary policy

transmission model that will continue to benefit the eurozone, acting as

"buffer" against political instability risks in Italy.

     "As Mario Draghi, the ECB President, has more than once stated, the

Eurosystem will continue to reinvest the principal payments for an extended

period of time after the end of net asset purchases and in any case for as long

as necessary. This means that the repaid stock from maturing securities will be

channelled back into the system," Taddei said.

     In fact, abundant liquidity support will come from reinvesting the repaid

stock back into fixed rate full allotment operations, which will not end with

the APP but will be guaranteed until at least the end of 2019.

     --EXTENDED APP

     Taddei is quite confident that the ECB could even extend the purchases

beyond the so far set date of September.

     "We must take into account that the APP exit must be soft. Inflation is

stuck at 1.3-1.4%, still well below the (ECB's) target and there is a chance,

not too farfetched, that the APP could be extended a few more months beyond

September. And when securities purchased under the APP reach maturity, the ECB

will simply re-introduce back into the system that same value stock," he said.

     "Practically, those E2.5 trillion worth of APP purchases will not be kept

locked-up in a drawer, or as a budget reserve but will still, though in a

different and less direct way, circulate within the financial sector acting as a

buffer for banks across the eurozone," added Taddei, the driving force behind

Renzi's Jobs Act reform that modernized Italy's labour market.

     It is a "virtuous cycle" that transcends the mere termination date of the

quantitative easing, he continued.

     --NO ECB OPTION SHORTAGE

     Taddei brushed away concerns that the ECB might face an ammunition shortage

and be "out of time" in exiting from such extraordinary phase, arguing that

"there is no ultimatum ahead".

     There is still more the central bank can do, according to Taddei, including

reverting back to buying more public debt of member states after a break.

However, it is highly unlikely that the ECB could start doing what it has so far

avoided -- mainly securitizations practices.

     "I doubt there will be any additional purchases, but one thing is sure:

those APP trillions will not be simply dropped overnight once the program

terminates. There's already been a partial rollover of reinvestments," Taddei

said.

     Prolonged ECB liquidity support, potentially well into mid-2019, is thus

good news for Italy, only now seeing some light in the forming of a new

government, some 2 months after the elections. If the latest negotiations

between Five Star and Lega fail, another 8 months could pass before a fully

operative government is in place.

     "This is one main reason why markets, except for a few ups and downs, do

not appear particularly concerned with Italy's outlook. Prolonged liquidity

pumping will act as parachute helping steer the country through unchartered

waters".

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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