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