MNI SOURCES: Italy Coalition Members See ECB OMT A Last Resort

By Silvia Marchetti

     ROME (MNI) - Sectors of Italy's governing coalition, trying to persuade

their political partners that the country should borrow from the eurozone

bailout fund, said last resort financial assistance could also come from the

European Central Bank's outright monetary transactions programme, which would

see the ECB buying potentially limitless quantities of shorter-term Italian debt

on secondary markets, sources told MNI on Thursday.

     The ECB could potentially activate OMT should other tools, including the

central bank's EUR750 billion Pandemic Emergency Purchasing Programme, prove

insufficient in supporting government finances, sources at the Democratic Party

and the small Italian Viva party said.

     In order to be eligible for OMT, Italy would first have to obtain a credit

line from the European Stability Mechanism. The Democrats are trying to win over

the populist Five-Star Movement to this idea, so long as the loans come with

only minimal conditions and a European Union summit next week agrees on progress

towards a Recovery Fund, potentially funded by joint European debt sales. ESM

money would help Italy to pay for its response to the coronavirus pandemic and

reduce its additional bond issuance needs, they argue.

     Italian Prime Minister Giuseppe Conte also opened the door to potential ESM

credit on Wednesday.

     "The ESM opens the doors to unlimited purchases of short-term bonds by the

ECB through the OMT program, this is very important," a Democrat official said.

"But first, let's take it one step at a time. First: the potential use of the

ESM."

     --NO AUTOMATIC OMT

     An ESM loan would not "automatically translate into OMT activation", the

official said, noting that "the fact that the ECB's OMT is already there, on the

table, ready to be deployed in case of need, is alone reassuring for both

markets and Italy."

     A source in the smaller Italia Viva party, founded by former Prime Minister

Matteo Renzi agreed: "Potential activation of OMT would be as a vital safety net

in case of need and would contribute to further stabilise financial markets,"

the source said, stressing that its use would only be a measure of last resort.

"This is also why we can't afford to say no to ESM help."

     A source close to discussions among Eurozone finance ministers, however,

told MNI that an ESM loan by itself would make little difference to Italy's

financing needs, and that its main significance would be to pave the way for

OMT.

     The outcome of next week's European Council meeting, at which EU leaders

are set to approve a package including EU unemployment insurance and reinforced

lending capability for the European Investment Bank will be crucial in

determining whether Italy turns to the ESM, the Democrat source insisted. But he

noted: "there's no stigma attached to OMT anymore. We're no longer in 2008, and

OMT could be activated for any or all European countries in need, not just for

one."

     Borrowing from the ESM alone, together with other European funds already

due, could reduce Italy's additional bond issuance to cope with the coronavirus

crisis by at least EUR47 billion, sources told MNI on Wednesday.

     The Five-Star Movement, the biggest party in Italy's parliament and key to

the governing coalition, was once stalwart in its opposition to ESM funds, but

is now wavering, with some officials suggesting that condition-free loans might

be acceptable. Others remain adamantly against such a move.

     "If we ever turn to the ESM, that's the beginning of the end for Italy. OMT

would be the final blow," one Five-Star official said, "There is no such thing

as 'zero conditions'. Italy would turn into the new Greece."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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