The Strategist

Is Draghi trying to scare Italian government?

10/15/2018 - 16:42

Head of the European Central Bank, Mario Draghi, warned Rome before the official budget presentation: do not expect that the ECB will save the situation.

World Economic Forum
World Economic Forum
At a press conference held on October 13 at the IMF and World Bank meeting in Bali, Draghi expressed confidence that a budget agreement would be reached, and urged all parties to “moderate the tone.” Draghi also noted that the resonance from the growth in the yield of Italian bonds, which reached perennial highs, did not spread to European bond markets. "Everything that happened today was local to Italy."

When asked by CNBC whether the ECB intends to abandon plans for tightening the policy by the end of the year, with a subsequent spread of the effect of contamination or a further increase in profitability in Italy, Draghi said: “I believe that the authorities, and, by the way, all the parties, not only Italy, will eventually find a compromise solution and come to an agreement."

Draghi suggested that the situation was "dramatized," and this is "not the first time that deviations from the established rules have been observed in Europe."

But investors are concerned that the Italian government can take advantage of this precedent and there is a risk that violating the EU budget rules will not entail serious penalties for them. And if the situation worsens for the Italian financial markets, they will be able to count on the support of the ECB. However, in an interview with CNBC, Draghi said that this was not possible.

Italy should submit its draft budget for 2019 for consideration by the European Commission on October 15.

Referring to the technical rules of the program of buying sovereign bonds in the framework of direct cash transactions of the ECB, Draghi explained that it requires "strict conditions related to the ESM program (European Stability Mechanism)," and said he was confident that the solution would be found the onset of the critical moment.

Draghi’s confidence regarding the Italian budget contrasts with the more cautious tone of his statements about the global risk factor noted in the IMF’s latest annual growth forecast. It's about trading tensions.

The head of the ECB did not say whether he was more optimistic about the prospects for a resolution on the trade front.

"This is an eternal problem," he said, adding, "For example, we had positive news about signing of a trade agreement with the United States, Canada and Mexico."

Draghi added that the trade standoff between the United States and China remains one of the most important targets for observation. And although it is too early to make predictions about how the dispute will end, Head of the ECB acknowledged that "the degree of concern has certainly grown, let's say, over the past six months."