This Transmission Protection Instrument (TPI), the European Central Bank’s anti-fragmentation tool, cannot be used to borrow from countries under extreme openness protocols as stated by the monetary authority this Thursday.
According to the mechanism’s published details, the ECB will apply four eligibility criteria for accepting country debts. The Frankfurt-based institution will not borrow from nations covered by either an extreme deficit protocol or the macroeconomic imbalances protocol.
Likewise, the ECB will assess whether the country in question demonstrates financial sustainability, evaluating the trajectory of public debt against the analyses of the European Commission, the European Stability Mechanism, and the International Monetary Fund.
Fourth, the authority, led by Christine Lagarde, will determine if the country’s macroeconomic policies are sound and sustainable, meaning compliance with recovery and resilience plans and adherence to recommendations in the European Semester market.
The TPI is added to the toolbox to be used by the ECB in response to erratic counter-market dynamics that threaten the transmission of monetary policy.
The volume of purchases under the TPI will depend on the severity of risks faced by the ECB, and there will be no ex ante restrictions on purchases. Purchases will cease once there is a lasting improvement in the transmission of monetary policy.
The ECB stressed that activating the TPI cannot interfere with monetary policy. Purchases will be conducted in a manner that avoids a lasting impact on the Eurosystem’s balance sheet or the central bank’s monetary position.
The Authority will acquire debt on the secondary market issued by independent entities with maturities of 1 to 10 years. If warranted, the ECB will consider whether to also purchase private sector debt (business sector). [ECB press release, 2024]