Mike Dolan: The ECB is sending a chaotic signal “something is right”.

Warning that inflation is unacceptably high and will remain above the 2% target over the three-year forecast horizon, the ECB on Thursday announced its first interest rate hike in more than 10 years. The next month after the completion of new purchases in the long-term from July 1, the program of buying bonds.

Although ECB President Christine Lagarde stressed that the central bank was “set up” to avoid “fragmentation” of borrowing costs among eurozone members after the completion of the bond purchase, financial markets were far from certain.

Many investors doubt that Ms. Lagarde’s evolutionary approach to ECB policy-making – which seems to give more power to national central banks and milder monetary countries than those at the center – will allow the same unlimited commitment. cost control. debt on the periphery, like the one given by his predecessor Mario Draghi.

Effective Commentary During a London speech in 2012, Draghi attributed “everything you need” to ending the two-year existential euro debt crisis at the time. As Prime Minister of Italy, he may have good reason to worry that ten years from now, these words have not found such a strong response in the markets.

Italian government bonds, the euro’s second-largest sovereign debt market, fell in size and sentiment indicators of high-indebted European sovereign states after reports on Thursday as Italy’s nominal yields rose sharply from those of Germany’s benchmark counterparts.

As futures prices accounted for a whopping 1.2 percent of the ECB’s additional increase between the previously announced increase in July and the end of the year, the yield on Italian 10-year bonds rose to 20 basis points per day to its highest level since 2018 by 3.715% and two fingers from eight-year highs …. Yields in Spain, Portugal and Greece have also fluctuated.

Equally alarming is the fact that the risk premium for Italian 10-year bonds has risen to 225 basis points compared to German ones, the highest level since the pandemic, which resulted in multiple financial aid and increased national debt. A record 160% of gross domestic product.


Speaking at the Amundi Paris World Investment Forum during a meeting of the ECB, former chief economist of the International Monetary Fund Olivier Blanchard said he feared the ECB did not yet have the tools to convince investors that fragmentation was serious.

Blanchard believed that the tightness of the ECB’s monetary policy, which is likely to be needed to control inflation, was less than required by the US Federal Reserve – because US labor markets are much tighter, the ECB’s strengthening should not theoretically be a problem. the problem of debt sustainability.

But he added that bond investors still need to be persuaded, as excessive growth in the value of long-term loans can in itself change these viability parameters and create a problem of “self-realization” that the ECB will eventually have to deal with.

“My main concern for the ECB is to convince investors that the spread will remain low, you have to convince them that you will do whatever it takes,” said Blanchard, now a senior fellow at the Peterson Institute for International Economics. .

“If investors think you’re going to invest a little, but not enough, they’ll still demand a bigger spread,” Blanchard said. “At the moment, I am concerned that the ECB does not have a process in which it can intervene sufficiently to address this issue, and I suspect that this will be a problem for the next year or two.”

As the ECB announced the completion of its asset purchase program launched in 2014 to prevent potential deflation, Ms. Lagarde insisted that the central bank has the flexibility to deal with any fragmentation that may arise.

“If necessary, as we have shown in detail in the past, we will deploy either existing adjusted tools or new tools that will be available,” Ms. Lagarde told a news conference. “But we are committed – committed – to the proper transmission of our monetary policy.”

But “appropriate” is a more vague concept when you tighten the main monetary policy – in contrast to the period 2012-2014, when lighter and lighter policies corresponded to the main picture of deflation. Similarly, the ECB’s objections to “unjustified” fragmentation remain vague in the eyes of many.

Moreover, ECB sources told Reuters after the meeting that the vast majority of politicians opposed the announcement of a new tool to combat fragmentation this week.

The prospect of using coupon and / or random bond proceeds purchased through a separate Pandemic Emergency Procurement Program (PEPP) in the event of a resumption of stress is also limited to defining this tension as closely related to the pandemic – and does not follow. from rising inflation as such.

In general, investment firms seem to be concerned about changing the consensus of the government if the hawks return to the table of leaders and believe that differences and hesitations can be costly.

“The central bank hopes that it will not need to build another program to support Italy,” Hetal Mehta said in an interview with Legal & General Investment Management. “The increase in ECB interest rates and the value of Italian loans calls into question the resilience of Italian debt.”

The author is the editor-in-chief of financial and market affairs at Reuters News. All the opinions expressed here are his own.

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