After the emergency policy meeting on June 15, the European Central Bank (ECB) promises “flexibility” while managing huge balance sheets and offers new tools to tackle the risk of eurozone bond fragmentation. By creating it, I tried to mitigate the fear of a debt crisis. ..
The ECB said at a meeting last week that it plans to raise 25 basis points in July to deal with inflation. This is the first increase in 11 years. The ECB said it could continue to raise rates significantly in September if necessary, adding that it would stop buying European government bonds.
These developments have negatively impacted Southern European countries and have significantly boosted borrowing costs. The ECB was asked to provide more information on how it planned to prevent fragmentation of the eurozone bond market. The European bond market then plunged, forcing the ECB to hold an unscheduled emergency meeting.
The ECB Board met on June 15 to “exchange views” on current market conditions. press release Said. In December 2021, the phased process of policy normalization began and the ECB promised to act against the “risk of resurrected fragmentation.”
The ECB argues that the COVID-19 pandemic leaves a “permanent vulnerability” in the eurozone economy, contributing to “uneven communication” of monetary policy normalization between jurisdictions. did.
“Based on this assessment, the Board has decided to apply flexibility to reinvesting due redemptions. [Pandemic Emergency Purchase Programme] Portfolios are a prerequisite for the ECB to fulfill its price-stabilizing mission with the aim of maintaining the functioning of monetary policy transmission mechanisms. “
After the meeting, the ECB will mandate the services of the Governing Council’s relevant “Eurosystems Commission” and the Central Bank to accelerate the completion of the design of new “anti-fragmentation measures” for the Board to consider. Said that it was decided. Reuters..
Earlier this week, the yield gap between German and Italian government bonds widened to its highest level since March 2020. Italian spreads peaked at about 250 basis points on June 14. This is the highest spread since 2014 and raises concerns. About the sustainability of the country’s high debt levels.
At the end of 2021, Italy had the second highest debt-to-GDP ratio in Europe at 151%, and Greece was at the top with 193%.
“If investors can’t buy or sell bonds in the secondary market and issuers have to postpone funding, the central bank needs to be concerned,” said Christoph Rieger, head of fixed rate strategy at Commerzbank. “. Bloomberg..
“But in contrast to previous episodes of chaotic market movements, this time inflation makes a difference. The ECB simply needs to tighten monetary policy and higher interest rates, so it’s simply a problem. You can’t invest money. “