Italian Government bonds have surged this week and the role of ECB and its president, Mario Draghi, former governor of Bank of Italy, has come under scrutiny. The ECB, with its bond purchase programme, has the weaponry to stop the rise in bonds.
Mr Draghi has insisted that the bond purchases would be limited, temporary and ensuring the central banks’s interest rate policy was “transmitted” via the financial markets to the real economy. He had rejected the idea of ECB acting as “lender of last resort” to governments. Since it first started buying in May 2010, the ECB has been most successful when supported by responsive governments.
Italian bonds have touched 6.77% before ECB intervened by light buying, bringing down the 10 year debt rate to 6.60%. The ECB insists that central bank action cannot replace government steps to restore investor confidence.
Bankers have expressed that yields above 6.5% is unsustainable. More worrying fact for traders is that yield spreads over German bunds have rose to 500bps, making the market fear that additional margin will be charged for use of Italian bonds as collateral for loans, which could trigger a vicious cycle of higher yields.
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