The body orders the design of a mechanism to control risk premiums, but does not specify how it will be implemented or when it will be implemented
The European Central Bank (ECB) yesterday took a measure to prevent fears of the economic slowdown with the end of the stimulus measures that have hit peripheral markets in recent days from reawakening old ghosts of the sovereign debt crisis in 2012.
The monetary organization called an emergency meeting on Wednesday in which it agreed to “flexibly reinvest” the maturities of the bonds it acquired under the PEPP program during the pandemic. In other words, the maturities of that portfolio, which is around EUR 1.7 trillion, will mainly be used to buy debt from countries such as Spain, Italy or Greece, without prioritizing criteria such as the weight of each economy in the region .
The regulator acknowledges that the pandemic has left lasting vulnerabilities in the eurozone, so the measure will be applied “to maintain the correct transmission of monetary policy, a precondition for the ECB to fulfill its mandate for price stability”.
Christine Lagarde herself already launched this idea at the meeting that the said organization held last week, aware of the risk that the rapid rise in their risk premiums poses for these most indebted countries. These indicators reflect the extra return investors demand for buying debt from a country compared to Germany, the region’s main benchmark.
“Market concerns are mounting over rising debt levels and high inflation, which will weigh heavily on economic growth with the biggest widening gap in Italian and German bond yields since early 2020,” said IG analyst Sergio Ávila. company.
In the Spanish case, the bond rose above 3% this week for the first time since 2014. And the risk premium has risen in recent days from 70 basis points at the start of the year to 137 basis points. Bigger was the rise in the Italian benchmark, which shot from 160 basis points to 250 in just two months.
The simply surprising announcement of the ECB meeting caused a rebound on the European stock markets from the very first hour and calmed the debt markets. Specifically, the yield on the ten-year Spanish bond fell 7% to 2.81% at the best of the session, while the national risk premium declined to 123 basis points.
However, the experts agree that the bells should not just be thrown just yet. Especially since in its concise statement – only two paragraphs long – the ECB has not given any details about the instrument with which it will try to avoid a lack of control in the debt markets. The body only confirmed that it has mandated its committees to “accelerate the design of a new instrument” for “anti-fragmentation”. The problem? It is unknown what the specific vehicle for it will be, nor how and when it will be implemented.
Analysts for the DWS manager also point out that “this should give the ECB the ability to raise interest rates more quickly and aggressively.” They therefore expect the agency to be able to specify its new instrument as early as July, when the first cash price increase since 2011 is expected.
Movements will now have to be measured to the millimeter. Especially in an environment where the US Federal Reserve (Fed) is well ahead in this new cycle. And it’s that fears that central bank efforts to curb runaway inflation are hurting the recovery could continue to wreak havoc on markets.
It seems clear that the memory of a two-speed Europe that existed ten years ago – with Spain, Italy, Greece and Portugal completely off the radar of investors – is far from being repeated today. But Lagarde is aware that markets are unpredictable. And also that, after years of expansionary policies, the ECB does not have the arsenal that Mario Draghi had at the time to salvage the situation.
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.
