The agency wants to stop the escalation of risk premiums, despite the limited room for maneuver to take measures, without further tightening the balance
Maximum concern at the European Central Bank (ECB) given the recent sell-off in government bond markets which, although far removed from 2012 levels, has brought back the worst memories of Europe’s debt crisis.
The monetary body is forced to convene an emergency meeting for next Wednesday where it will, unsurprisingly, discuss possible tools to prevent risk premiums, especially in peripheral countries, from skyrocketing in the coming months, when the institution is fully involved in the new cycle of interest rate hikes.
“The Governing Council has an ad hoc meeting this Wednesday to discuss market conditions,” a central bank spokesman confirmed. Conditions that have deteriorated significantly, with yields on the Spanish 10-year bond (reference indicating what investors are asking to fund government debt), rocketed above 3% for the first time since 2012. Same boost for Italy, with its benchmark bond above 4%.
The German representative on the ECB’s Governing Council, Isabel Schnabel, emphasized yesterday that the agency will not “tolerate” a disorderly increase in risk premia that poses a risk to the transmission of monetary policy. “We will not tolerate changes in financing conditions that go beyond fundamentals and threaten the transmission of monetary policy,” Schnabel said during his speech at an event in Paris.
That message of ‘zero tolerance’ will, however, remain somewhat short if this Wednesday does not materialize in tangible measures. It is true that ECB President Christine Lagarde recalled last week that the body has tools to counter fragmentation, such as the ability to reinvest debt acquired under the Anti-Pandemic Program (PEPP). But that announcement was very watered down compared to what the market expected and marked the turning point for increased pressure on debt.
That market pressure prompted Wednesday’s meeting, which also coincides with the US Federal Reserve (Fed) meeting. A week ago, all indications were that Jerome Powell’s institution raised interest rates to 50 basis points. But in the past few hours, especially after learning the data of a runaway 8.6% inflation, the market is confident that the increase will be 75 basis points.
This is a historic step that, incidentally, is putting pressure on the ECB in the pace of monetary policy implementation. So far, the gesture of the meeting has already served to let the market know that the agency is taking the issue seriously. Something that was not entirely clear at the last meeting last week.
“The main message is that the Governing Council of the ECB is taking this seriously, compared to the big disappointment last week that they didn’t even talk about fragmentation,” Frederik Ducrozet, director of macroeconomic research at Pictet WM, said on his Twitter account. .
“Market concerns are mounting over rising borrowing costs and high inflation, which will weigh heavily on economic growth, with the biggest increase in the gap in Italian and German bond yields since early 2020,” I recall IG’s Sergio Ávila.
The yield on the Spanish 10-year bond falls 2.6% in the first hour, although it remains above 3%. On the contrary, and given the idea that the institution is looking for a plan to help peripheral countries, the yield on the German bond continues to rise to 1.75%. As a result, the Spanish risk premium (difference between the yield on the Spanish and German bonds) remains stable at 132 basis points.
But watch out. From Bankinter’s analysis department, they indicate that “the measure to avoid fragmentation must be clear, strong and transparent, otherwise mistrust in the European bond market will continue to prevail.”
For their part, the stock markets are reacting with gains and the Ibex-35, which has lost more than 9% in just four sessions, moves to 8,211.63 whole numbers. In the early stages of Wednesday’s session, most stocks traded higher, led by Santander (+3.46%), BBVA (+3.43%), Bankinter (+3%), Sabadell (+2.97%) , Melia Hotels (+2.73%). ) and Caixabank (+2.39%).
The price of a barrel of Brent crude, a benchmark for Europe, came in at $120, down 0.24%, while a barrel of WTI, a benchmark for the US, fell 0.29% to 118. dollars.
The price of the euro against the dollar was 1.0473 greenbacks, while the Spanish risk premium reached 132 basis points and the required yield on the 10-year bond was 2.991%.
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
