Mario Draghi: Fears of Italian debt spiral
"We must act fast. The sorts of interest rate rises seen over the last three months, if protracted, could lead to an uncontrollable spiral," said Mario Draghi, who takes over as head of the European Central Bank next month.
Mr Draghi said austerity measures must be enacted "immediately" and warned that Italy’s €54bn austerity package is "not enough".
Yields on 10-year Italian bonds surged above the danger level of 6pc in August on recession fears. Intervention by the ECB saved the day but yields have been creeping back up again as the ECB steps back. Yields rose to 5.71pc yesterday. Germany’s Bundesbank is adamantly opposed to further ECB bond purchases.
Mr Draghi hinted that ECB help is nearing its political limits, evoking Italy’s "atavistic temptation" of waiting for an army to cross the Alps to sort out its problems. "It is not going to happen. All our citizens must be are aware of this. It would be a tragic illusion to think that the help will come from outside," he said.
–Mario Draghi fears Italian debt spiral, Ambrose Evans-Pritchard
One should fear an Italian debt spiral, yes. However, fiscal consolidation is an anti-growth policy that leads to higher deficits in the short-to-medium term. So what Draghi is saying doesn’t make a lot of sense. What Draghi should be worried about it is the ECB’s lack of support for Italy. The ECB is the difference – at least as far as liquidity issues are concerned. Longer-term solvency is an entirely separate issue.
These guys don’t get it.