Italy accuses the ECB of political interference — but the experts are unconvinced
- The new populist Italian government was quick to highlight a data release Monday that showed the euro zone's central bank bought a net 3.6 billion euros ($ 4.21 billion) of Italian bonds last month.
- However, analysts have told CNBC that there's nothing suspicious about the ECB's activity.
The European Central Bank (ECB) is under renewed criticism for buying fewer Italian sovereign bonds in May, when political instability meant it was a time when Rome may have needed it the most.
The new populist Italian government was quick to highlight a data release Monday that showed the euro zone's central bank bought a net 3.6 billion euros ($ 4.21 billion) of Italian bonds last month. This is part of its massive bond-buying program where it essentially lends money to governments to stimulate growth and inflation.
This new figure was a smaller number as an overall proportion of all the net purchases conducted by the central bank. At the same time, the ECB also bought more German bonds — another number that didn't go down well in Rome.
The accusations suggest some believe the central bank could have purposefully manipulated the market in a way that would hurt the country and pressure the new lawmakers with borrowing rates rising rapidly. The yield on the 10-year Italian paper, which moves inversely to the price, has risen sharply in the last few weeks — hitting nearly 3.2 percent last Tuesday — in a sign that investors were fretting about the country's political instability. The move even managed to roil global stock markets.
Claudio Borghi, a top economic adviser for the Lega party — one of the two political parties forming the new Italian government — told the Financial Times it was "no surprise" to discover the ECB had been buying more German bonds. The right-wing Lega and the anti-establishment Five Star Movement are notably euroskeptic and have formed a coalition that wants to increase public spending and, thus, challenge European fiscal rules.
However, analysts have told CNBC that there's nothing suspicious about the ECB's activity.
"This is an artefact of people not understanding the two sides of the large scale asset purchasing program," Erik Jones, a professor of International Political Economy at Johns Hopkins University, told CNBC Tuesday via email.
But the ECB's program is not only about making new purchases on government bonds. It also involves redemptions and replacements of previously-bought bonds. This means that, for example, when a French bond expires, the ECB will replace it with more French debt.
"A lot of German bonds matured in April, so (the ECB) bought a lot of German bonds (in May)," Jones added to explain the surge in German bonds last month.
Peter Chatwell, head of rates strategy at financial group Mizuho, also told CNBC that this was the reason behind the jump in German debt buying. "Yesterday's ECB PSPP (public sector purchase program) data do not show anything too suspicious," he said.
Analysts at UniCredit also noted that the 46 percent monthly-increase in purchases of German securities was offset by the decline in purchases of debt from pretty much every other country in the euro area, not only Italy. Austria, Belgium, Spain, Finland, France, Ireland, Italy, the Netherlands, Portugal, Slovenia and Slovakia all registered declines in purchases of securities on an average of 8 to 10 percent, the bank said in a note Tuesday.
Chatwell added, however, that the comments surrounding the ECB's activity show "how politically sensitive the government bond buying program is."
The economic disparities across the euro zone have often raised different questions about the real reason behind what the ECB does. One the one hand, in countries like the Netherlands and Germany, there are voices saying the central bank should stop its bond buying because it is mainly helping less-fiscally sound members, such as Portugal and Italy. On the other hand, there are many who still believe that there are fragilities in the euro zone and as a result the ECB has no other choice but to keep buying debt.
The political sensitivity "is one reason why we fear the market may be at risk of correction," Chatwell told CNBC. He described that the market is still assuming that the ECB will support the Italian market even if the new government looks to implement measures that increase public spending. And, in his opinion, as inflation rises in the region, the more hawkish members of the ECB will gain further ammunition to vote for the end of the program, independently of what happens in Italy.