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More on Reinvestment Phase

MNI (London)
By Silvia Marchetti
     ROME (MNI) - The European Central Bank may have limited headroom for any
possible future interventions when the asset purchases program terminates,
Lorenzo Bini Smaghi, former ECB Executive Board member told MNI in an exclusive
     The post-APP normalisation phase implies going back to conventional
monetary policy after years of unconventional measures -- and it might not be a
smooth transition, Bini Smaghi argued, with the degree of growth consolidation
across the Eurozone playing a key buffer role in guaranteeing an easy switch to
normal mode.
     "As the US experience shows, if the economy continues to grow in coming
months, normalization should be on average easier, less complicated than
expected for the Eurozone," said Bini Smaghi. 
     But many uncertain factors loom. "The real issue, however, is whether all
components of the Eurozone are ready and all elements of the transmission
mechanism, in particular the banking system, are prepared for normalization.
Whether we are sufficiently ahead into growth recovery, debt reduction, and the
capital position of the banking system," he warned.
     Countries more exposed to debt, and where bad loans are still significantly
high, could face a tougher period ahead if they fail to boost fiscal efforts and
strengthen their financial systems ahead as APP draws to a close.
     Italy is among the countries still in difficulty. According to Bini Smaghi,
to ensure that monetary policy normalization and the higher rates that will
eventually follow will be easily absorbed by Italy's economy, it is necessary
for both debt stabilization and reduction, alongside an acceleration in curbing
the ratio of non-performing loans.
     The whole of the Eurozone, not just Italy, must be adequately equipped to
weather the normalization period, and the slower than expected growth of the
start of 2018 is not an encouraging sign. June will therefore be a key month to
fully evaluate 'real-time' growth and inflation outlooks as the latest Staff
Economic Projections are published.
     Another critical issue is what happens next, after the ECB reverts to
conventional policy and tightens its accommodative stance. Any future tool box
could risk facing a potential ammunition shortage, with a narrower degree and
scope to fight any potential future cyclical downturn, especially if the central
bank misses chances for a timely exit from its extraordinary measures.
     "If we consider that it is hard to do more Quantitative Easing (QE) given
the percentage of public debt that the ECB already holds in relation to some
countries, and that we are still in negative rates, if another slowdown comes
the ECB might not have further room for manoeuvre. It would need to be
innovative," Bini Smaghi stressed.
     Rethinking the stock of investments in the ECB's balance sheet would not
solve the issue. The point is not whether it could be an option for the central
bank to hold parts of the stock to gain a new instrument in the monetary policy
toolbox -- and which would be the most appropriate -- but how and when to act in
order to spare ammunition for future needs.
     That is why in his view keeping some powder dry could contribute in
building headroom for potential monetary intervention in the post-normalisation
     "Certainly, the ECB will want to be in a position to have some adequate
instruments to use when the next slowdown comes," he noted.
     Bini Smaghi also noted that the normalisation period would be a gradual
process, reflecting the growth trend across the bloc, noting that the would need
start with the deposit rate below zero.
     "Normalization at a certain point also implies raising rates -- especially
bringing them back to zero -- though the timing will depend on the economic
situation," he said.
--MNI London Bureau; tel: +44 203-586-2225; email:
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