MNI INTERVIEW2: TPI To Shield Spain From Italy Nerves-Official

The European Central Bank’s spread-compressing Transmission Protection Instrument will shield Spain from the fallout of any market nerves elsewhere in the eurozone, Spain’s Treasury Secretary General Carlos Cuerpo told MNI, hailing the new tool as a sign that of a shift in the ECB’s approach since the debt crisis a decade ago.

Cuerpo pointed to the stability of Spain’s risk premium last month when the collapse of Italian Prime Minister Mario Draghi’s coalition led him to say he would resign after September elections.

“This is due to a number of circumstances: the good image that the markets have of Spain and the ECB’s answer to the question of how to fight market fragmentation,” he said in an interview, referring to the instrument announced Jul. 21 which is meant to compress any undue blowout in spreads within the eurozone.

There is no debate that Spain meets the four criteria for fiscal sustainability which the ECB uses to decide which countries can benefit from the TPI, said Cuerpo, adding that the 2022 country’s growth outlook may be revised slightly higher after data last Friday.

The unanimous decision to approve TPI as a permanent part of the ECB’s toolkit and the fact that there is no prior limit on the size of its purchases together with the commitment to only deploy it in order to ensure smooth transmission of monetary policy throughout the bloc and not for debt financing, are all reassuring to markets, Cuerpo said. (See MNI SOURCES: Majority Sufficient For ECB's New TPI Tool)

CHANGE IN TONE

The ECB was wise to incorporate existing European Union fiscal assessment procedures into its eligibility criteria for the TPI, while its decision to allow itself discretion as to whether to employ the tool avoids a system based on “tickboxes”, he said.

“The conditionality is quantitative and qualitative. That’s an element of flexibility that adds credibility [to TPI],” he said, adding that European Commission proposals for the reform of the bloc’s Stability and Growth Pact borrowing rules may incorporate a similar approach, along the lines of a joint Spanish-Dutch paper. These could include country-specific consolidation strategies that are compatible with growth and investment, he said.

TPI, continues a change in tone from EU institutions also seen in the approval of the EUR800-billion NextGenerationEU programme and the ECB’s own Pandemic Emergency Purchase Programme, and stands in stark contrast to the tougher stance taken towards financially struggling countries during the debt crisis, Cuerpo said. North-south divisions in the bloc are now less marked, he said.

SPANISH GROWTH

Turning to Spain, he said the country's economic forecast panel may revised its 2022 growth outlook upwards after data on Friday showed higher-than-expected Q2 expansion.

“It is to be expected that further forecasts will be around 4% or slightly higher, and around or above 2% in 2023,” he said.

Cuerpo pointed to the labour market as another positive, with employment reaching 2008 levels “but with a much less overheated or non-overheated economy” than the one 14 years ago.

The country’s labour market may be on the verge of a structural improvement following the approval of a reform early this year which makes layoffs more difficult, and incentivises both the hiring of young workers and the adoption of shorter working hours.

Spain’s relatively low exposure to Russian gas, around 10% of its total consumption, together with government plans for energy saving and efficiency, should limit the impact of any halt in supplies, he said. In the event of a Russian gas shortage, Spain would only need to reduce its gas consumption by 8%, according to European Commission contingency plans.