The ECB urgently convenes its governing council in the face of the escalation in risk premiums

The European Central Bank (ECB) has called an extraordinary meeting of its governing council for this Wednesday due to the scale of the risk premiums of the countries of southern Europe after the announcement of interest rate hikes last Thursday. “The Governing Council will have an ad-hoc meeting this Wednesday to discuss current market conditions,” confirmed a spokeswoman for the institution. The meeting has been precipitated after the debt of some countries, including Spain, marked its maximum since 2014. The yield on the ten-year Spanish bond exceeded 3% on Tuesday due to the prospects of higher rate hikes and a deterioration of the economy. This trend occurred throughout the southern arc of Europe: in Greece it exceeded 4.5%; in Italy, 4%, and in Portugal, 3%. The prospects that the Federal Reserve could go further have not helped to contain the debt, since the markets fear that a sharp increase in rates will end up causing a recession that will spread to other countries in two ways: dragging other central banks into that dynamic to make money more expensive or for pure contagion effect.

Faced with this situation, this Tuesday Isabel Schnabel, a member of the institution’s executive committee, stated: “Our commitment to the euro is our anti-fragmentation tool. This commitment has no limits”. The warning from Schnabel, who has insisted that new instruments will be launched if necessary, comes after the more aggressive tone printed by the Eurobank has not taken long to move to the risk premiums of the peripheral countries. The markets are considering that the ECB could put on the table a greater repurchase of peripheral bonds with the reinvestments, the debt programs launched in recent years or even a new instrument to curb risk premiums.

Not even six months have passed since interest rates were in negative territory. This was 2021: investors then paid to lend money to the State. Also to Spain, which was financed at negative rates last year. That dynamic began to change in early 2022, when markets assumed that the ECB would begin to tighten monetary policy in the face of runaway inflation. And it was accentuated last week, when the entity chaired by Christine Lagarde made it clear that its main priority now is to control the rise in prices.

Analysts expected that, in parallel, the ECB would bring some new plan or instrument to cushion the damage that peripheral countries might suffer. But that didn’t happen. Instead, Lagarde intoned a whatever it takes which seems not to have convinced the markets. “We will not tolerate fragmentation that prevents the transmission of monetary policy throughout the entire euro zone. We have shown in the past, and we will in the future: we will deploy new instruments when necessary”, affirmed the head of the ECB. And in any case, she said that she would apply the necessary “flexibility” to the bond purchases that will be made with the maturities of the debt, which analysts put at around 200,000 million euros per year.

At a conference in Paris, Schnabel admitted on Tuesday that the “increase in sovereign risk premiums has accelerated, liquidity conditions have become more challenging and daily changes in bond yields have increased.” This fragmentation of the debt markets, according to the German, can jeopardize the transmission of the monetary policy dictated from Frankfurt. For this reason, she has warned that, if this trend continues, they will use all that “flexibility” with reinvestments in “a very short period of time” if it is concluded that “the transmission of the policy is at risk.” The ECB is even willing to go further.

Existing and new tools

He knows in depth all the sides of the coin.


“We will react to new emergencies with existing and potentially new tools,” added the German, who recalled the ECB’s reaction with massive debt purchases to combat the pandemic. “These tools could be different, with different conditions, duration and guarantees to stay firmly within our mandate. But there can be no doubt that, if and when necessary, we can and will design and deploy new instruments to ensure the transmission of monetary policy and thus our core price stability mandate,” she added. .

The ECB took it for granted that the risk premium of the southern countries was going to increase because it had to reflect the situation of their finances. However, he believed that they now play with an important asset: a tourist season that seems exceptional and that will prevent them from entering a recession. Something that he did not see so clearly for other economies with greater industrial weight, such as Germany. This should convince investors that this situation is not like the one in 2012 and prevent them from speculating on the bonds of southern Europe. However, risk premiums soared after the press conference. This Tuesday, that of Greece reached 298 points; that of Italy, 247, that of Spain, 137, and that of Portugal, 135. The last time these countries reached those levels was in May 2020, in the midst of the first wave of the pandemic.

“We believe that the spread between Italian and German 10-year bonds would need to widen by another 100 basis points or so, to around 3.5%, to force the ECB to make a stronger formal statement of support for bonds. peripherals. And even then, any initial announcement can be disappointing, ”says an analysis by the consultancy Capital Economics released this Thursday.

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