The European Central Bank may be forced to ramp up its efforts if it hopes to stave off another financial crisis, according to BCA Research.
In a research note, BCA points out that, “Political events in Italy are not progressing as fast as markets would like.” Indeed, it says it’s not clear whether any political steps will be sufficient to satisfy the markets at this point. As a result, the region’s central bank is once again intervening, by reportedly buying Italian bonds in the secondary market.
“Unfortunately, the impact on yields is muted since there are now few other buyers for the debt,” it says, and two major clearinghouses have increased margin requirements for Italian debt, which decreases the bonds’ liquidity, leading to still-higher yields.
“The further danger is that Italian banks begin to come under pressure as markets discount the effect of sovereign debt markdowns on their balance sheets,” it says. And, as the European bailout fund isn’t large enough to rescue the Italian banks, BCA says that the ECB “may soon find itself dealing with a bigger and bigger problem”.
“A further deterioration in Italian sovereign debt prices might prompt the ECB to follow the Federal Reserve and Bank of England and expand its balance sheet through more aggressive purchases, possibly unsterilized, of government debt,” it says.
“The sovereign debt crisis once again threatens to get ahead of policymakers’ efforts to contain it. More aggressive action by the ECB may soon be required to prevent a financial crisis,” BCA concludes.