- Investors are worried that the Italian government may take a gamble that running foul of EU budget rules won't incur serious penalties, and that, if things do turn worse for Italian financial markets, they''ll be able to lean on the ECB for support.
- Draghi, for his part, told CNBC that would not be a possibility.
- The central banker also said on Saturday that an important risk to watch is the ongoing trade spat between the U.S. and China. "The degree of concern in, say, the last six months has certainly gone up," he said.
BALI, Indonesia — European Central Bank President Mario Draghi is sending a warning to Rome ahead of its formal budget submission: Don't expect the ECB to save the day.
In a Saturday press conference at the IMF and World Bank meetings in Bali, Indonesia, Draghi said he was confident that a budget agreement would be reached and urged all parties to "calm down with the tone." He also voiced relief that there has not been evidence of a wider spillover effect in European bond markets, even as Italian yields hit multi-year highs. "Everything that happened today is local to Italy."
When asked whether an eventual realization of contagion or a further rise in Italian yields would force the ECB to scrap tightening plans by year end, Draghi told CNBC: "I don't want to speculate on this. I just don't want to conceive such a hypothesis. I'm confident that the authorities — and by the way all parties, not only Italy — all parties will in the end find a compromise solution, an agreement."
He went on to suggest that the situation had been "dramatized," and that was "not the first time there are deviations from established rules in Europe."
But investors are worried that the Italian government may seize on that precedent and take a gamble that running foul of EU budget rules won't incur serious penalties, and that, if things do turn worse for Italian financial markets, they''ll be able to lean on the ECB for support.
Draghi, for his part, told CNBC that would not be a possibility.
Italy is due to send its 2019 budget to the European Commission for analysis by Oct.15.
Referring to the technical rules of the ECB's Outright Monetary Transactions sovereign bond-buying program, he explained that it requires "strict conditionality attached to an ESM ( European Stability Mechanism) program," and reiterated his belief that a solution will be reached before it arrives at that point.
Draghi's confidence about Italy's budget stood in contrast to his more cautious tone about the big global risk factor identified in the IMF's annual growth forecast this week: trade tensions.
Draghi declined to say whether he was more optimistic about the outlook for a resolution on that front.
"It's an ongoing issue," he said. "For example, we had positive news about signing of a trade agreement with U.S., Canada and Mexico."
The central banker added that an important area to watch is the ongoing trade spat between the U.S. and China. While he said it's still too early to make predictions about how the dispute will conclude, he acknowledged that "the degree of concern in, say, the last six months has certainly gone up."
According to Draghi, the biggest risk discussed at the annual meetings was the rising rate environment and a sharp repricing in assets.
His comments close out a week in which global markets were rocked by fears about the U.S. Federal Reserve and the prospect of more aggressive tightening.
Draghi played down his own concerns, however, saying the perceived threat to Europe had yet to materialize.
"So far, financing conditions are accommodative enough that we think the system is pretty resilient to that. So when we talked about these risks, we're talking about possible situations that may happen in the future," he said. "Having said that, these risks are now tilting to the downside for global growth, while, let's say six months ago, we would have said they were pretty balanced."