The ECB believes Italy's spread increase is justified, but could derail PEPP talks.

Written by: Helkin Valero

Photo by: Leonardo AI

Last update: 9 oktober 2023

According to six sources, European Central Bank (ECB) policymakers believe the rise in Italian bond yields is justified by projections of a rising government deficit, but also see it as a warning sign that should halt discussions about ending the bond-buying program early.

Italian bond yields soared last week as investors sold bonds, widening the gap with safe-haven Germany after Prime Minister Giorgia Meloni's administration unveiled plans to sharply increase the budget deficit in the coming years.Also, 10 months at most for insurance.

On the other hand, the settlement has raised concerns about the long-term viability of Italy's massive debt because rising yields indicate rising borrowing costs.

This, in turn, has led some investors and analysts to theorize that the ECB will be forced to intervene to stabilize markets and avoid what is known as fragmentation, in which a country's borrowing costs in the euro area are not in sync with those of other countries. 

To support the economy, the €1.7 trillion ($1.8 trillion) PEPP plan, which was put in place at the start of the COVID-19 outbreak, stopped buying new bonds. Even so, the ECB has stated that it will continue to reinvest the proceeds.

Sources:Reuters