Peter Praet, the European Central Bank chief economist yesterday said that the ECB’s policy of holding interest rates at a record low level over a prolonged period of time could have the potential to endanger stability. Although he does not believe the eurozone is yet at risk from asset bubbles, he believes individual countries need to sanction local measures to head off problems. As it stands Praet believes the eurozone still needs ‘significant stimulus’ and he can see no discernible risk apparent, however that is not to say things can change.
‘Keeping rates low for long periods can raise challenges for financial stability further down the road,” Praet said, adding, ‘In this context, activating macroprudential instruments where needed is essential to ensure resilience, contain pro-cyclical behaviours and prevent the emergence of financial imbalances’. He went on to say ‘There is no evidence of excessive misalignment across asset classes in the euro area right now’ however, ‘there are signs that valuations are stretched in specific market segments’.
And Italy’s new government yesterday agreed a 2.4% deficit of GDP in 2019, which had displeasured Brussels and alarmed markets. As Pierre Moscovici, the European Economics Commissioner put it ‘We don’t have any interest either that Italy does not respect the rules and does not reduce its debt, which remains explosive’.
Italy already has the largest debt in Eurozone after Greece, but hey, what’s close to 131% debt to GDP between friends. Giovanni Tria, the Economy minister and an independent in the coalition government had attempted to reign in the deficit to 1.6%, however with no luck after it was rumoured he would be ‘replaced’ if he didn’t come into line. At the time of writing Italy's 10 year sovereign debt was yielding 3.17%, up 29 basis points from market opening.
Still Luigi Di Miao, the joint deputy prime minister seemed chuffed with the outcome. In a message on his Facebook page (which seems the norm these days) he said ‘Today is a historic day! Today Italy changes! For the first time the state is on the people's side. For the first time it is not taking away, but giving’.
Not to worry, I’m sure the next generation will be more than happy to pick up the tab!