Highlights:

• Recently the ECB presented its tool to prevent fragmentation in financing conditions. Under the Transmission Protection Instrument (TPI) it can potentially buy unlimitedly sovereign (and eventually private) 1Y to 10Y debt with pari passu treatment.
• Eligibility formally requires compliance with the EU fiscal framework, no severe macroeconomic imbalances, fiscal sustainability and sticking to EC recommendations. Presently Italy, Cyprus, Greece do not fulfil these criteria. However, the final decision is fully in the hands of the Governing Council (GC) so that these criteria are only one input for the final decision.
• We think that the GC remained vague and indefinite to protect itself against lawsuits. Also, it was not revealed which indicators will be used to detect fragmentation. Uncertainty surrounding the TPI remains huge.
• Markets will in the end need to test whether the TPI is more than a paper tiger.
   

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