Aurelia Butler

The normally straightforward process of CDS payouts was thrown into chaos in June when Washington said its sanctions on Russia represented a total ban on buying Moscow’s debt. An investor who buys a CDS contract usually hands over the underlying bond to the bank or fund that sold them the CDS when a default happens. It traditionally involves an auction to determine the price, but under the sanctions that exchange effectively became illegal.The license authorizes U.S. persons to purchase or receive Russian bonds starting two days before the announced date of the auction, and up to eight business days after the auction takes place.The committee that sets the auction date has a scheduled meeting on Monday at 1300 GMT after having met three times this week.”OFAC has issued two General Licenses (waivers) to help U.S. and other global investors more cleanly exit their exposures to Russia,” a Treasury spokesperson said, referring to the Office of Foreign Assets Control which enforces U.S. sanctions.The move also authorizes financial institutions “to facilitate, clear, and settle” the newly-authorized transactions, the Treasury’s website https://home.treasury.gov/policy-issues/financial-sanctions/faqs/added/2022-07-22 added. Analysts had estimated that roughly $2.5 billion worth of Russia sovereign debt CDS had been held up by the problems.”This is an example of the fine tuning of a sanctions apparatus that the United States has had significant experience with through the years,” said Jamal El-Hindi, a counsel at law firm Clifford Chance.”Specific licenses, general licenses, are used to make sure that the overall impact of the sanctions is doing what they want it to do, and not blocking things that they don’t want it to block,” he said.Russia was declared in default last month although it had already tripped in May by failing to pay an additional $1.9 million of interest that had built up on an earlier overdue payment as Western sanctions shut off payment channels.The confusion had seen investors lobby Washington to make Friday’s allowance, which came alongside another ‘license’ that authorises, through to October 19, wind-down transactions involving securities issued by Russia-based entities under agreements that were entered into before June 6.”The Treasury granting the license was sensible and helps to fulfill the purposes of a CDS and the reason that the CDS investment exists,” said Jay Auslander, a partner at law firm Wilk Auslander. “From a financial point of view it is good news and what we would have hoped to see.”Still, a holder of Russian CDS said those contracts could have been settled without bonds changing hands, and that the waiver could end up favoring sellers of protection insurance like U.S. investment firm PIMCO, which holds a large chunk of those contracts.The Treasury’s license effectively allows U.S. entities to buy Russian debt if that purchase is necessary to settle the insurance payout, meaning firms such as PIMCO could be left holding a long position in the country’s bonds which are currently trading at huge discounts.”(That) seems counter to what the sanctions are trying to do,” the CDS holder said, speaking on condition of anonymity.PIMCO declined to comment. More

Kyiv and Moscow have struck a deal aimed at averting a global food crisis, agreeing a “de facto ceasefire” on cargo ships that will collect millions of tonnes of stranded grain from Ukrainian ports.At a signing ceremony on Friday in Istanbul, UN secretary-general António Guterres hailed it as a “beacon of hope on the Black Sea”.But with fighting continuing in Ukraine and deep mistrust between the two sides, diplomats warned that upholding the deal would present huge challengesGuterres said the agreement would “bring relief for developing countries on the edge of bankruptcy and the most vulnerable people on the edge of famine” by helping to stabilise global food prices. Turkey’s president Recep Tayyip Erdoğan, who played a central role in negotiating the deal and whose military will help monitor Ukrainian ports, said his country was “proud to be instrumental in an initiative that will play a major role in solving the global food crisis”.A Russian soldier keeps watch in a field near Melitopol, south-east Ukraine © Sergei Ilnitsky/EPA-EFE/ShutterstockUnder the deal, which aims to restore grain shipments to prewar levels in the coming weeks, Ukraine and Russia have agreed not to attack merchant vessels, civilian vessels or port facilities covered by the agreement, according to a senior UN official.It represented a “de facto ceasefire”, the official said, but added: “It doesn’t mean to say that parts of those ports which are not engaged in this mission are protected.”It is unclear how the deal will be enforced and what will happen if either side is accused of violating it. Turkey, a Nato member with close ties to Kyiv and Moscow, has agreed to send monitors to the ports along with UN representatives. But a senior Ukrainian official involved in the talks said Kyiv still had serious reservations. Without a binding mechanism to hold Russia to its commitments, the other parties essentially have to accept Moscow’s words, the official said. “[There is] no enforcement, just promises.”Mykhailo Podolyak, an adviser to Ukrainian president Volodymyr Zelenskyy, said in a tweet that there would be an “immediate military response” in the event of Russian “provocations” affecting the grain supplies. Victoria Nuland, one of the US state department’s top diplomats, said she believed Russia was forced to agree the grain deal because it was facing criticism from developing countries, which the Kremlin has been courting diplomatically since the start of its war in Ukraine.“Russia ultimately felt the hot breath of global opprobrium,” Nuland told the Aspen Security Forum on Friday. “They were losing the global south.”Nuland, under-secretary for political affairs, criticised Moscow for taking so long to reach the deal, saying it should have been reached quickly rather than after nearly two months of negotiations.She said the decision to agree a deal was also motivated by the Kremlin’s need to renew its own food exports, noting its has been “hard for them to get shippers and insurers to deliver their own food” and “they need the money”. John Kirby, a spokesman for the US National Security Council, said Washington expects the deal to be implemented “swiftly”, and called on Russia to follow through.He said the US was not part of arranging the deal. Kirby voiced scepticism that Russia would fully comply. “We’re hopeful that this deal is going to make a difference, but we’re clear-eyed about it.” A second, parallel agreement also negotiated by the UN seeks to unblock the export of Russian food and fertiliser to global markets in an unwritten quid pro quo for president Vladimir Putin aimed at winning his consent for the grain deal.The Kremlin had said it wanted the lifting of sanctions against insuring its exports, giving ships port access, and processing payments.The US and EU never specifically banned Russia’s exports, and the clarifications on western sanctions against food and fertiliser they issued this week are not part of the UN-brokered deal.An EU official argued the deal put constraints on Russia’s future military operations in the Black Sea, protected Odesa from attack, and gave Ukraine an economic lifeline as it teeters on the brink of default.Kyiv is worried that the west has made too many concessions to Russia without extracting binding commitments in return. “It is more like a personal deal between the participants,” said an official close to the talks.Ukraine nonetheless felt it had little choice, the official added, as time runs out for it to export last year’s harvest before it rots. The war has already severely hampered Ukraine’s planting cycles and future harvests.Before Putin’s invasion of Ukraine in February, the country was the world’s fifth-largest exporter of wheat and a crucial supplier to countries in the Middle East and Africa.

The blockade of its ports has left an estimated 22mn tonnes of wheat, corn and other grains stranded in silos, with devastating effects on global food prices and poverty levels. The World Food Programme has warned that the conflict is expected to push an additional 47mn people globally into “acute hunger”, with the steepest increase in starvation rates in sub-Saharan Africa.UN officials who helped broker the grain deal say they expect it to be a commercial operation, rather than a military one, with Ukrainian pilot boats helping cargo vessels to safely navigate the Ukrainian coastline after collecting grain from the ports of Odesa, Chornomorsk and Yuzhny. While a senior UN official said it would take “a few weeks” for full implementation, he added that some initial shipments might happen sooner to “show that it can work, that it can be done”. The aim was to return to prewar export levels of about 5mn tonnes of grain a month, he said.Additional reporting by Mark Raczkiewycz in Kyiv and Peter Spiegel in Aspen More

It was Lagarde’s strongest commitment to date to fighting inflation, which hit 8.6% in the euro zone last month, despite growing fears of a recession in the bloc as a result of Russia’s invasion of Ukraine. “We will raise interest rates for as long as it takes to bring inflation back to our target,” she told the German network of newspapers.The ECB raised its interest rates for the first time in 11 years on Thursday and guided for more hikes at its upcoming meetings. More

Russia’s central bank has cut interest rates in a surprise move that it said was in response to a slowdown in inflation and an improved GDP forecast.The decision to cut rates to 8 per cent on Friday, from 9.5 per cent in June, suggests that the central bank believes Russia is weathering the storm of western sanctions imposed over its invasion of Ukraine better than it had feared.The central bank lifted rates to 20 per cent after Moscow’s decision to go to war in late February, as the state lender sought to stabilise the rouble. Since then it has gradually unwound the increase, with rates now below where they were just before the invasion.But the latest cut was significantly sharper than expected and contrasts with the recent large rate increases in the eurozone and US.“A cut of 150 basis points is a big surprise to both us and the market,” Sofya Donets, Russia economist at Renaissance Capital, wrote in a note to clients.“It was an unexpected decision for the market,” said Yuri Popov, interest rate strategist at SberCIB, the investment branch of Russian state lender Sberbank. Analysts had anticipated a decrease of 50 basis points, he said.Donets said two factors were behind the rate cut: current inflation dynamics and inflation expectations.“We may see a second month of deflation in July, while August-September are traditionally favourable months for price dynamics. This is reflected in a significant revision to the 2022 inflation forecast by the regulator,” she wrote.The Russian central bank said inflation had fallen from 17.1 per cent in May to 15.9 per cent in June. It expected annual inflation to fall to between 12 and 15 per cent by the end of this year. In late April, it had predicted annual inflation of between 18 and 23 per cent in 2022.“We still believe the main reason for the decline in inflation is the price correction after the spike in March,” central bank governor Elvira Nabiullina said at a press conference after the rate decision was announced. “Now the situation has changed. The rouble has significantly strengthened.”The rouble slipped below 58 to the US dollar after the central bank announced the rate cut. In the fortnight after the invasion, the currency lost almost half its value, reaching 150 to the dollar. It has been rising steadily since, aided by stringent capital controls.The central bank said it would consider further rate cuts later in the year. Its next meeting is set for September 16.The decision was partly motivated by the risk of the rouble weakening in the event of a global recession or “a strengthening of external trade and financial restrictions, which would have a pro-inflationary effect”, Popov wrote in a note.It was also driven by an updated assessment of the health of the country’s economy. Although the outlook for the Russian economy remains poor, the central bank’s expectations have been revised higher.This picture contrasts with the gloom in the global economy, with China struggling to bounce back from Covid-19 lockdowns, financial markets increasingly expecting a US recession and European economies hit by high gas prices.“Incoming data indicate that the economic downturn will be more protracted in time and perhaps less deep,” said Nabiullina, referring to the hit Russia has taken as a result of the Ukraine invasion.The Russian central bank said in its statement announcing the rate decision that the decline in business activity had been slower than it had forecast in its June statement.

Russian companies were still facing challenges as sanctions and embargoes hit supply chains, it said. But business sentiment was “gradually improving” as businesses found new suppliers and markets.“The decline in GDP is projected to be smaller, largely due to a more moderate reduction in exports. This is primarily due to the redistribution of oil exports to new markets,” said Nabiullina. As a result, the central bank said it was changing its forecast for Russia’s GDP this year and now expected a decline of between 4 and 6 per cent, driven by supply-side factors. In April, the bank predicted a GDP drop of between 8 and 10 per cent for 2022. It expects a return to growth by 2024. However, restrictions on the withdrawal of foreign currency — introduced immediately after Russia’s invasion of Ukraine — would be extended when they come up for review in September, said Nabiullina. More

Good evening,As if deadly heatwaves, political turmoil in Italy and the first interest rate rise in 11 years wasn’t enough, new data this morning have raised fears of a eurozone recession, capping a momentous week for EU policymakers.S&P Global’s “flash” estimate for its PMI survey showed business activity falling to a 17-month low in July, going into reverse for the first time since February 2021 as orders and output fell. The composite reading, which measures activity in services and manufacturing, fell from 52 last month to a lower-than-expected 49.4, where 50 marks the divide between expansion and contraction.Consumer confidence in the bloc is also at a record low as consumers struggle with soaring energy and food prices, according to the European Commission’s latest survey on Wednesday.The data follow yesterday’s European Central Bank decision to increase interest rates by a more-than-expected half a percentage point in an attempt to contain surging inflation. It also unveiled a new tool — the transmission protection instrument or TPI — which aims to prevent surging borrowing costs creating a new eurozone debt crisis.The ECB, argues commentator Martin Sandbu, was reminding everyone who really has the authority: “The rate decision was punchy and clearly intended to flex some monetary tightening muscle: markets should not expect the ECB to hesitate to curb inflation, the message seemed to be. But the TPI is by far the most interesting policy — and political economy — move.”The ECB also had to contend with yesterday’s resignation of Mario Draghi as Italy’s prime minister, pushing the country into a snap general election in September, which polls suggest rightwing parties could win. President Sergio Mattarella also raised concerns about Italy’s ability to push through reforms needed to receive EU pandemic recovery funds.Krishna Guha of US investment bank Evercore summed up the challenge facing the ECB: “The combination of a brewing giant stagflationary shock from weaponised Russian natural gas and a political crisis in Italy is about as close to a perfect storm as can be imagined.”Tensions are also rising over the European Commission’s “save gas for a safe winter” plan, which recommends member states cut gas use by 15 per cent between August and March in an attempt to wean them off Russia supplies. Spain, citing “unfair sacrifices”, is among member states voicing concern, alongside Portugal, Greece, Italy, Poland and Cyprus.Latest newsUS deputy treasury secretary to travel to Europe next week to discuss stepping up sanctions against Russia (Reuters)American Express boosts revenue forecast on strong consumer spendingRetail sales in Canada rise for fifth consecutive monthFor up-to-the-minute news updates, visit our live blogNeed to know: the economyRussia and Ukraine have agreed a deal to allow the export of millions of tonnes of wheat, corn and other crops stranded at Black Sea ports with a “de facto ceasefire” on cargo ships, helping avert a global food crisis and ameliorate some of the desperation faced by Ukraine’s farmers. Russian gas began to flow again through the Nordstream 1 pipeline to Germany yesterday after a 10-day maintenance shutdown, although Berlin remains wary of Moscow’s power to “blackmail” Europe. Germany has agreed an €8bn bailout for Uniper, the country’s largest importer of Russian gas, which has been facing insolvency since supplies were reduced in mid-June. A UK parliamentary report said the government urgently needed to strike an agreement with the EU to co-operate on emergency energy supplies if needed.Latest for the UK and EuropeBusiness activity grew at the slowest rate since the lockdown of early 2021, according to the UK section of the PMI survey, dropping from 53.7 in June to 52.8 in July. More signs of UK consumers tightening their belts came with official data this morning showing retail sales fell in June for the second month in a row. Shoppers are spending more buying fewer goods as inflation soars. UK consumer confidence remains at its lowest since records began in 1974.UK debt interest payments hit an all-time high in June, highlighting the limited space available for tax cuts, one of the key promises of Liz Truss, one of the candidates to become the next prime minister. Economics editor Chris Giles argues that the country needs new rules, giving greater prominence to supply conditions, wages and corporate pricing. In the meantime, our Big Read tackles the burning question: Who really deserves a pay rise?Tom Keatinge of the Royal United Services Institute think-tank writes in the FT that Britain needs to improve its defences against “weaponised finance”. Plugging loopholes that allow “dirty” money to circulate in the UK is the easy part, what’s much harder is identifying the seemingly “clean” money being used for influence, he says.Russia cut its interest rate to 8 per cent as it said inflation was slowing. Rates had hit 20 per cent earlier this year but are now below what they were before it invaded Ukraine.UK regulators have warned airlines that they could take action if “serious problems” with the treatment of passengers are not rectified. Meanwhile, strike action by British Airways workers at Heathrow has been called off after staff accepted a new pay offer. Traveller frustration is now focused on the port of Dover, which declared a “critical incident” today after the port said a lack of French passport control officers had led to a huge tailback of holidaymakers.Global latestThe Pakistani rupee has suffered its worst week in more than two decades as investors feared a $1.2bn IMF loan payment would not be enough to stop a balance of payments crisis.South Africa raised interest rates to a more-than-expected 5.5 per cent, its biggest increase in 20 years. Inflation in Africa’s most industrial economy hit a 13-year high in June.China is undergoing its first overseas debt crisis after its Belt and Road Initiative led to a jump in loans going bad, as our Big Read explains. Back at home, bargain-hunting Chinese shoppers are flocking to discount stores selling soon-to-expire food and drink.Sheila Bair, former chair of the US Federal Deposit Insurance Corporation, writes in the FT that the current Federal Reserve leadership should take lessons from its former chair Paul Volcker and his successful fight against inflation.Need to know: businessTwitter blamed the “uncertainty” around Elon Musk’s potential purchase of the company and slowing digital ad spending for a 1 per cent drop in quarterly revenues to $1.2bn. It follows disappointing results from fellow social media company Snap yesterday, which led it to lose a quarter of its market value.Musk’s Tesla overcame production disruption in China to report a 57 per cent leap in profits. The electric car company was also able to unwind its contentious $1.5bn bet on bitcoin as cryptocurrency prices tumbled.Speaking of which, markets news editor Adam Samson and digital assets correspondent Scott Chipolina answered readers’ questions on the crypto crash. Get clued up on the latest developments at our new crypto hub.Tensions over the UK’s decarbonisation plans exploded when Tata, owner of the UK’s largest steelworks, said it would shut down operations if the government did not give it £1.5bn in subsidies. Business secretary Kwasi Kwarteng said the decision would be left to the new prime minister. Steel manufacturers are also angry at plans to lift anti-dumping measures on China.Oilfield services company Schlumberger upped its full-year forecast after reporting bumper second-quarter net income of $959mn, more than double the previous year’s level, as oil and gas demand soared. Here’s our interview with Shell chief Ben van Beurden on energy transition plans. Blackstone, the world’s largest alternative asset manager, warned of a continuing slowdown as it reported a “material reduction in deal activity”. However, its fee-based earnings and cash flows remained near record levels.HSBC became the first foreign lender to install a Chinese Communist party committee in its investment banking business, highlighting tensions facing the bank as it tries to navigate between Beijing and the west. A CCP committee is required by Chinese company law but is not yet widely enforced among foreign finance groups.Calpers, the largest US pension plan, reported its first loss since 2009 as a result of “tumultuous” markets. “This is a unique moment in the financial markets and we’ve seen a deviation from some investing fundamentals,” said chief investment officer Nicole Musicco.Starling, one of the UK’s “challenger” banks, turned its first annual profit of £32.7mn thanks to its move into the mortgage market. Science round-upCoronavirus cases rose in several parts of the world. In England, the percentage of people infected is still rising, reaching similar levels to those seen in April during the Omicron BA.2 wave, affecting 1 in 17 people.Tokyo warned of an “explosion” of infections as nationwide Japan hit a new daily record of more than 150,000 cases. Meanwhile, China reported daily cases above 1,000 for the first time since May, raising the prospect of further lockdowns.New strains of coronavirus should boost the flagging vaccine market, putting agile manufacturers in pole position, says the Lex column. The mRNA technology used by BioNTech/Pfizer and Moderna lends itself to swift redesign of vaccines, unlike jabs made from a modified adenovirus by AstraZeneca/Oxford university.EU member states are close to agreeing with BioNTech/Pfizer that Covid-19 vaccine deliveries be stretched into 2024, amid a glut of shots, even as health authorities broaden eligibility for boosters to tackle rising infections. The push to delay deliveries highlights the change from scarcity last year to surplus this year, as governments ease restrictions and move away from the idea of mandatory mass vaccination.Get the latest worldwide picture with our vaccine trackerAnd finally . . . We’re all familiar with discrimination on gender and race, but what about on nationality? Simon Kuper explains how we often base someone’s aptitude for a job on where they come from. Think “Brazilian footballer”, “French chef” or even “Tibetan monk”.A hierarchy of nationalities is holding many back © Harry Haysom More

The European Central Bank was unable to react to soaring inflation by raising rates as early as many policymakers wanted because of a commitment to forward guidance that it has now ditched after nine years, according to people involved in the decision.The ECB surprised many economists by raising interest rates for the first time in over a decade by half a percentage point on Thursday, despite having guided until recently that it intended a move of only half that size.Two of the bank’s governing council members told the Financial Times they believed it would have raised rates at least a month earlier if they had not been bound by guidance that rates would not rise until it stopped buying more bonds in early July.“A reasonable number of people on the council wanted to do 25 basis points in June,” said one ECB rate-setter. “Locking ourselves into forward guidance was unhelpful in that respect.” A second council member said the benefit of a June increase was outweighed by “the loss of credibility” that would have resulted from breaking its guidance on the timing of when asset purchases would end, adding: “It tied our hands.” The insights underline how central banks are struggling to provide reliable guidance on their monetary policy plans after being caught out by the rapid surge in inflation to 40-year highs. In addition, the ECB is grappling with a European energy crisis and political instability in Italy.“Forward guidance has definitely overstayed its welcome,” said Spyros Andreopoulos, senior Europe economist at French bank BNP Paribas. “They kept being surprised by the data, which affected their credibility.” An ECB spokesperson said the council’s June meeting in Amsterdam gave “unanimous” support to leaving rates unchanged and saying it intended to do a 25 basis point rise in July, with a bigger move likely in September.ECB president Christine Lagarde said on Thursday that it had ditched its previous guidance on the size of future rate rises after “front-loading” its exit from negative rates and was now shifting to a “meeting-by-meeting” approach to setting borrowing costs. “We are much more flexible; in that we are not offering forward guidance of any kind,” she said. “From now on we will make our monetary policy decisions on a data-dependent basis, [we] will operate month by month and step by step.”The decision to ditch forward guidance on rates, which has been an important part of the policy toolkit since its introduction by former ECB chief Mario Draghi in 2013, was broadly welcomed by analysts — even if some were still irritated by how the central bank broke its last stated commitments.“No guidance is better than bad guidance,” said Marco Valli, chief European economist at Italian bank UniCredit. “This will probably raise volatility in rate-hike expectations as markets try to understand the ECB’s reaction function at a time of elevated, supply-driven inflation and substantial weakening of economic activity.”The ECB is the latest central bank to question the value of providing guidance. The US Federal Reserve last month abandoned its heavily signalled plans for a half-point rate rise only days before announcing its first 0.75 percentage point increase since 1994 after inflation rose by more than it had expected.Fed chair Jay Powell said after the decision that it was “very unusual” to have key data land “very close” to a rate-setting meeting, adding: “I would like to think, though, that our guidance is still credible.”

Bank of England chief economist Huw Pill said earlier this month that it would be ‘unhelpful’ to provide further guidance on rates © Charlie Bibby/FT

The Bank of England surprised investors last year by not raising rates when a move was widely expected in November and then raising them when it was unexpected in December. BoE chief economist Huw Pill said earlier this month it would be “unhelpful” to provide further guidance on rates while opinion was split between its policymakers. But a few days later BoE governor Andrew Bailey said its first half-point rate rise since 1995 “will be among the choices on the table when we next meet” in early August.ECB officials said forward guidance was most useful to signal that rates would stay low for longer once it had cut them below zero and it was buying vast amounts of bonds. “We’re moving away from that world now,” said one official.However, Lagarde did provide some guidance on the future direction of rates on Thursday, signalling more rises ahead. “At our upcoming meetings, further normalisation of interest rates will be appropriate,” she said, adding that the central bank aimed to “progressively raise interest rates to [a] broadly neutral setting. That’s where we want to arrive at”.Lagarde declined to estimate the neutral rate of interest — the optimal level where an economy is neither overheating nor being held back — but other council members put it between 1 and 2 per cent, meaning its deposit rate still has some way to go from zero now.The ECB chief also ditched the word “gradual” in describing its rate-rising plans. She only used the word once in Thursday’s press conference — to describe wage growth — compared with seven times in June.

Council members criticised the concept of gradualism in June, when some said it “could be misleading if it was interpreted as implying too slow or too rigid a pace of adjustment in the monetary policy stance”, according to the minutes of last month’s meeting.Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, suggested that the ECB publish the interest rate expectations of its council members over the next couple of years. This is similar to how the Fed publishes the median rate expectations of its officials every quarter.“The ECB has to come up with a new way of signalling its intention to the market,” said Ducrozet. “Otherwise it will add a layer of difficulty to predicting what they will do in the next meetings.” More

Long before he was Italian prime minister, Mario Draghi pronounced the euro to be “like a bumblebee.” In 2012, the then-president of the European Central Bank called it “a mystery of nature . . . it shouldn’t fly but instead it does”. The economic union is still only half-complete, held together by political will and policy creativity. This week, his successors in Frankfurt unveiled their latest improvisation — one that will really matter for whoever takes over from Draghi as Italian prime minister.One of the eurozone’s challenges is running monetary policy across a region where financial conditions vary dramatically. What happens when investors worry about one state’s debt sustainability? This concern can force up local interest rates, and can in effect mean that the central bank loses the ability to set monetary policy in that country. This is a bigger problem when rates are higher — and the ECB raised rates this week, by half a percentage point, for the first time in more than a decade.That worry is why the ECB unveiled on Thursday the so-called “Transmission Protection Instrument”, which gives the central bank discretion to buy government debt from eurozone countries where “deterioration in financing conditions [are] not warranted by country-specific fundamentals”. In short, if the ECB thinks investors are panicking, it will step in to buy debt and so put a floor under bond prices.Italy, where Draghi resigned this week as prime minister, is not the only problem, but it is the most pressing; its 10-year borrowing costs this week stood 2.3 percentage points above those in Germany, close to a recent three-year high. Italian debt stands at around 150 per cent of GDP. It is worth being clear about what this all means. The shape of the market in eurozone debt is going to be constrained by the ECB, which will limit the difference in borrowing costs between nations. But for states that are likely to benefit, this process will also create new dynamics, in part because of the programme’s conditions.States whose debt the ECB buys will need to comply with the EU’s fiscal rules, have a sustainable debt trajectory and make sure they follow any commitments they made in order to access post-pandemic EU funds.This will be of particular importance for Italy. Draghi’s government had negotiated to receive around €200bn from the EU’s post-pandemic recovery fund — and, in return, to make Italy more competitive and business-friendlier. Rome, in short, was being incentivised by the rest of the bloc to push through painful reforms. Draghi said on Wednesday that, in order to receive the next tranche of cash — worth €19bn — Italy had 55 separate targets to hit by the end of the year. These reforms should be supported to avoid future crises by getting Italy growing.It is unclear who will form the new government after the forthcoming election, which has been called for September. But the 17-month Draghi government may have laid down important guard rails for whatever comes next — since there is a steep price in EU funds for stepping away from his agenda. And by tying access to the TPI to continuing these reforms, the ECB has further sharpened incentives for the next government not to deviate from them — or risk a big sell-off of Italian debt. But the instrument is not about Italian politics. It is, above all, about making sure that the eurozone’s bond markets are in line with ECB policy as it raises rates to navigate ongoing price shocks. Pressure will mount as European states shoulder the costs of this inflationary slowdown. Expect more improvisation to keep the bumblebee aloft. More