HomeBusinessEuropean Central Bank calls for unscheduled bond market 'panic' meeting

European Central Bank calls for unscheduled bond market ‘panic’ meeting

The bank would hold the “ad hoc” meeting to discuss “current market conditions”, according to a central bank spokesperson. The meeting should have started at 5 a.m. ET.

The ECB left interest rates unchanged at its regular meeting last week but confirmed plans to raise the cost of borrowing by 25 basis points next month – its first rate hike in 11 years. — and said a bigger hike could follow in September “if the medium-term inflation outlook persists or deteriorates.” He also said he would stop buying European government bonds.
The US Federal Reserve is also currently meeting to discuss interest rates and is expected to raise US rates by three-quarters of a percentage point, something it has not done since 1994.

ECB plans to raise rates and end years of supporting the economy through bond purchases have sharply increased borrowing costs in some of Europe’s most indebted countries , which led the bank to ask for more details on how it proposes to prevent eurozone bond market fragmentation.

The spread between German and Italian 10-year government bond yields was at its highest since March 2020 on Monday, according to Tradeweb. The spread between German and Greek bonds has also widened recently.

Italian 10-year yields fell slightly on the announcement of the ECB’s emergency meeting, falling to just below 4% from 4.3% on Tuesday, according to Capital Economics.

“The ECB’s carefully communicated strategy was to end asset purchases and then raise rates, starting in small increments and accelerating if necessary,” noted Societe Generale strategist Kit Juckes. “This strategy is experiencing all kinds of problems today as the ECB meets to discuss its anti-fragmentation policy and tools.”

At the end of 2021, Greece had the highest debt-to-GDP ratio in Europe at 193%. Italy followed with 151%.

“Panic in the Outskirts”

Europe is in better shape than it was the last time the ECB started raising rates.

Greece’s economy, in particular, has exceeded growth expectations, and it has favorable terms on its debt that make repayment less of a concern. But this is not the case in Italy, which will have to refinance its debts earlier and where growth is lagging.

“Italy has not done enough serious reforms,” ​​said Holger Schmieding, chief economist at Berenberg Bank.

And turmoil in the bond market since last Thursday’s ECB meeting has piled pressure on the bank.

“With memories of the European debt crisis still fresh, investors are wondering how and under what circumstances ECB President Christine Lagarde would deliver on her promise…to act against ‘excessive fragmentation’ if needed after net asset purchases end,” Schmieding said. wrote on Wednesday in a note titled “Panic in the periphery: time for the ECB to show its game.”

The ECB said it would step in and resume bond purchases if the situation deteriorates rapidly. Still, it’s unclear exactly when it would kick in, making investors increasingly nervous.

“The ECB can contain the problem if it wants to,” Andrew Kenningham, chief economist for Europe at Capital Economics, said earlier this week. But they haven’t defined their “pain threshold”, he added.

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