The European Central Bank has sought to tackle fears that the eurozone is on the cusp of another debt crisis, saying it would speed up work on a new policy tool to counter surging borrowing costs in the region’s weaker eurozone economies.
After an emergency meeting on Wednesday, the central bank’s governing council pledged to accelerate plans to create a “new anti-fragmentation instrument” — a nod to the widening gap in the cost of borrowing between more stable sovereigns such as Germany and more vulnerable member states.
Bond yields of countries such as Italy and Spain shot up to their highest level for eight years after ECB rate-setters last Thursday announced plans to stop buying more bonds and start raising interest rates. The surge in borrowing costs has revived fears about a potential repeat of the damaging debt crises in 2012 and 2014 that nearly tore the eurozone apart.
The yield on the Italian 10-year bond was at 3.78 per cent on Wednesday afternoon, well below Tuesday’s closing level of 4.18 per cent.
The decision to call an emergency meeting less than a week after the last governing council vote underlines how rate-setters are concerned that their aim to tackle record eurozone inflation by ditching their crisis-era stimulus could be derailed if it revives bond market fears about the region’s weaker economies.
“The [coronavirus] pandemic has left lasting vulnerabilities in the euro area economy which are indeed contributing to the uneven transmission of the normalisation of our monetary policy across jurisdictions,” the central bank said in a statement after its meeting.
While there was no detail on how the ECB’s new instrument would work, some analysts think it could be an updated version of the securities markets programme that allowed the bank to tackle market fragmentation by buying €220bn of sovereign bonds from 2010 and 2012.
Silvia Merler, head of policy research at Algebris Investments, said the announcement “buys time” for the ECB, adding that it “does not take them out of the corner yet”.
Anatoli Annenkov, senior European economist at Société Générale, said the ECB “cannot do this on their own” and needed help from other EU institutions to calm market turmoil. A €800bn pandemic recovery fund that provides grants and cheap loans from Brussels to member states could be extended, he said.
The surprise meeting came ahead of the Federal Reserve’s monetary policy decision on Wednesday, with the market expecting the US central bank to raise rates by 0.75 percentage points. The euro gave up most of its earlier gains on the day, to remain up slightly at $1.043 against the US dollar.
The ECB also said on Wednesday that its governing council had approved plans to “apply flexibility” in the way it reinvests the proceeds of the bonds that will mature in the €1.7tn portfolio of assets bought to counter the impact of the coronavirus pandemic.
Analysts have estimated the ECB could muster at least €200bn of extra firepower this year to buy bonds of vulnerable governments through these reinvestments, which are expected to act as a first line of defence against bond market turmoil.
Carsten Brzeski, head of macro research at ING, said: “The reinvestments are already priced in — this is nothing new — so what the market is really testing is the ECB’s willingness to launch a new anti-fragmentation instrument.” He expected the ECB to launch the new tool next month.
While most central banks, including the Fed and the Bank of England, which is expected to raise rates on Thursday, can focus policy purely on bringing down inflation, the ECB is hampered by the fact that eurozone countries have their own fiscal policies and separate bond markets, despite sharing a currency.
ECB executive board member Isabel Schnabel said on Tuesday evening that the central bank’s commitment to the euro had no limits. “And our record of stepping in when needed backs up this commitment,” she added.
One of the last times the ECB called an unscheduled council meeting was at the start of the pandemic in March 2020, when it launched a vast bond-buying scheme to counter a sharp sell-off in debt of more vulnerable eurozone countries such as Italy.
Additional reporting by Tommy Stubbington
Credit: Source link
