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--Italian Debt Flare-Up Could Prompt "Whatever It Takes" Redux
--OMT Only A Last Option, Not Currently Under Discussion
     LONDON (MNI) - The European Central Bank could indicate willingness to
directly buy Italian government bonds if Rome's dispute with the EU were to
worsen and threaten to tip it into financial crisis, Eurosystem sources told
MNI, while stressing that no such programme was currently under consideration.
     While Italy's standoff with Brussels has shown signs of easing, the ECB
could, in extremis, step in should sentiment sour once more, sending bond
spreads wider and eroding the capital of Italian banks, several Eurosystem
sources said. A full-blown crisis would probably require an expression of
willingness to conduct Outright Monetary Transactions to buy Italian government
bonds, along the lines of ECB President Mario Draghi's famous "whatever it
takes" speech at the height of the eurozone crisis in 2012, they said.
     "The OMT could be an appropriate option in a new worst-case scenario, for
it tackles disruptive risks in the monetary policy transmission mechanism," one
official said, adding that such a negative scenario was "ruled out" for the
     Another senior Eurosystem source said that while Italy's problems were
currently regarded as fiscal and not the ECB's responsibility, OMT would be a
likely fire-fighting tool in an emergency, although he added that the central
bank was "not even discussing whether to discuss it" at present.
     Sources have separately told MNI the ECB is already considering a fresh
round of targetted longer-term repurchasing operations to be made available some
time after the anticipated end of its asset purchases in December, motivated by
the difficulties some banks, including Italian lenders, might have in repaying
earlier rounds of TLTROS when they come due in 2020 and 2021. But such
instruments would not address a full-blown Italian debt crisis.
     "If the row between Rome and Brussels worsens, TLTRO isn't enough and it
looks like spreads are heading too high for comfort, we can expect another
"whatever it takes" moment from [Draghi]. This is most likely to come in the
form of forward guidance signalling the ECB's willingness to step in with OMT,"
a third Eurosystem official said.
     There would be high barriers to such a move. The ECB cannot be seen to
tailor monetary policy to the needs of a single euro member country, and the
fact that Draghi is himself Italian would complicate the politics still further.
However, at least one Eurosystem official said a blowout in Italian spreads
might spark contagion among weaker eurozone economies, so the problem might no
longer be limited to Italy alone.
     An ECB spokesman declined to comment on the matter.
     In 2012, Draghi's words were enough to stem the selling of peripheral
eurozone bonds, and the OMT tool has still to be actually deployed. To be
eligible, Italy would have to accept a bailout programme, with tough conditions
like those imposed on Greece, something to which government officials contacted
by MNI were adamant they would never agree.
     Italy would never "bend its knee" and accept an OMT, which is "equal to the
Greek-style rescue plan carried-out by the Troika that literally destroyed
Greece and ruined families," a government source said.
     But a Eurosystem official recalled the initial resistance of Greece's
left-wing Syriza government to bailout conditions.
     "Once your neck is to the block, you think differently. Remember the Syriza
vote on leaving the Eurozone. It changes very much in that moment, I've seen it
many times."
     Market concerns over Italy's spending plans have pushed the yield on
10-year sovereign bonds up by about 150 basis points since the populist 5-Star
Movement neared a coalition deal with the hard-right Lega, which was clinched in
June. Rome has indicated it would have to take unspecified corrective measures
if the spread with German bunds rose to 400 basis points, but the yield
difference eased to about 290 basis points on Tuesday after Deputy Prime
Minister Matteo Salvini signalled on Monday the government might be prepared to
lower its fiscal deficit plans.
     Market pressure could further soften Italy's negotiating stance, another
source said.
     "If they indicate compliance before next year, spreads could come in."
     The same source suggested that the Lega could bend under pressure from
influential business supporters but populist elements of the government may want
to avoid making significant concessions ahead of EU elections next year.
     Another central bank official was pessimistic for the longer term, saying
that Italian populism has become too deeply ingrained. The question was not so
much whether Italy will leave the euro, but whether its exit can be managed in
an orderly fashion, the source said.
--MNI London Bureau; +44 203 865 3829; email:
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