The European Central Bank promised fresh support for the bloc’s indebted southern edge on Wednesday (June 15), tempering a market decline that threatened to repeat the debt crisis that nearly brought down the single currency a decade ago.
Government borrowing costs have soared on the periphery of the 19-country currency bloc since the ECB unveiled plans last Thursday to raise interest rates to rein in painfully high inflation.
But the bank did not assure investors that it would contain rising borrowing costs, only made a vague promise and stoked fears that it was abandoning the most indebted nations, such as Italy, Spain and Greece, which have struggled for years. under the weight of massive debt. stack of something
Reversing course just six days later, the ECB said it would send cash to the most indebted nations of the debt maturing in a €1.7 trillion pandemic support scheme that recently ended and that it would work on a new instrument to prevent a excessive divergence in borrowing costs.
“The Governing Council decided to task the relevant Eurosystem Committees, together with the ECB services, with speeding up the finalization of the design of a new anti-fragmentation instrument for consideration by the Governing Council.” said the ECB after an extraordinary meeting.
But ECB chief Christine Lagarde also tried to temper expectations, arguing that the ECB’s job is to control inflation, not help budgets.
“We cannot give in to fiscal dominance,” Lagarde told a forum in London. “Nor can we surrender to financial dominance; we have to fulfill our mandate.”
Dutch central bank chief Klaas Knot said policymakers instructed staff to work at an accelerated pace on the new tool, in case sending reinvestments to the south wasn’t enough.
“If it is not enough, rest assured that we are ready,” Knot told a conference.
The ECB statement calmed markets but left many disappointed.
“I think it’s essentially the bare minimum of what could be expected, but I also think it’s the most realistic result of what they could commit to today,” said Piet Christiansen, an economist at Danske Bank.
Meanwhile, Holger Schmieding, an economist at Berenberg, argued that the ECB was simply correcting last week’s mistake.
“Last Thursday, those words would probably have made a decisive and possibly lasting difference,” he said. “But after the turmoil of the last few days, the markets are now more nervous than before. Therefore, the ECB faces a higher risk that the markets could again test the ECB’s resolve soon.”
The announcement also drew criticism from those who argued that the ECB risked going too far.
“The ECB’s job is to comply with price stability, not to guarantee favorable financial conditions,” said Markus Ferber, a German conservative member of the European Parliament. “Some countries are now simply getting the bill for years of irresponsible fiscal policies.”
“If the ECB now launches yet another program to keep spreads low, it comes dangerously close to state funding of money,” Ferber said.
The euro fell nearly 1% against the dollar after the ECB statement, but Italian yields fell comfortably below 4%.
Meanwhile, the spread between Italian and German 10-year bonds, a key indicator, narrowed to around 222 basis points from around 250 basis points on Tuesday, indicating confidence that the ECB will finally act more decisively, as time at the monetary policy meeting on July 21. when it is almost certain to raise rates for the first time in more than a decade.
There is no universally accepted level for this spread, but Carlo Messina, chief executive of Intesa, Italy’s largest bank, said on Wednesday that the country’s economic fundamentals would justify 100 to 150 basis points.
Meanwhile, the Spanish 10-year bond spread barely changed at 126 basis points, while that of Greece stood at around 262 basis points, in line with its level before the ECB statement.
The ECB move comes on the same day the US Federal Reserve is expected to raise interest rates, with investors sharply increasing their bets on a 75 basis point hike, a change in expectations that has fueled a violent sell-off in world markets.