MNI INTERVIEW: ECB Would Have To Act Fast With Crisis Tool

The European Central Bank may have to bypass conditions it set for the activation of its Transmission Protection Instrument to contain a blowout in bond spreads if markets turn ugly fast, a former Polish central banker and consultant to the European Parliament told MNI.

While use of the TPI, which would allow the ECB to buy the debt of weaker eurozone states if prices moved out of line with fundamentals, is contingent on criteria including compliance with the European Union’s fiscal framework, in practice it is unlikely there would be enough time to check, said Marek Dabrowski in an interview.

“I don't think that the ECB has this kind of expertise. It will have to rely either on national central banks, which are part of it, or perhaps it will have to consult with the European Commission or with the ESM,” said Dabrowski, author of a recent briefing paper for the European Parliament on TPI.

But, he noted, “if the ECB is to intervene, its intervention makes sense only when it is done quickly, to calm markets.”

The ECB should be clearer about the circumstances in which it would intervene, said Dabrowski, although he noted that Governing Council policymakers might not yet be sure themselves.

“I also don’t see the reason to keep potential applicants for the TPI in a state of uncertainty, when it is in the interests of the ECB to push them to do their homework in advance in order to avoid such situations,” he said. (See MNI INTERVIEW: ECB To Clarify TPI In Coming Weeks - EP Adviser)

GOVERNMENT PRESSURE

While the ECB may hope it never has to deploy the instrument, as has been the case with the Outright Monetary Transactions tool created under Mario Draghi in 2012, it could come under intense pressure to do so from eurozone member states.

“It may be that the justification for intervention comes from the ECB’s own judgement or, worse, under external pressure to intervene,” said Dabrowski, who was a member of the Monetary Policy Council of the National Bank of Poland until 2004 and has also advised the IMF and the World Bank.

Recent selloffs in UK gilts show that while economies with global currencies and sustainable borrowing are more resilient to shocks, “you can’t test the limits indefinitely,” he said.

Several advanced economies, including some in Europe, are already above safe borrowing limits, he added, with the prospect of short-term stagflation and meagre growth in the medium- to-long term due to demographic changes.

“Most European economies, most advanced economies, will not be able to grow at a faster rate,’ he said. “The main message is to start fiscal adjustment now. Not a year or two years from now – although for some countries it may already be too late.”