These plans have sharply increased borrowing costs in southern European countries, prompting the central bank to provide more details on how it proposes to prevent the fragmentation of the eurozone bond market. .
“The Governing Council has decided that it will apply some flexibility in the reinvestment of maturing repayments in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism,” he said in a statement. a press release following the extraordinary meeting.
The spread between German and Italian 10-year government bond yields was at its highest since March 2020 earlier this week, according to Tradeweb. The spread between German and Greek bonds has also widened recently.
Yields on Italian 10-year bonds 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. “That strategy is in all sorts of trouble today.”
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 raised rates in 2011.
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.
“While memories of the European debt crisis are still fresh, investors are wondering how and under what circumstances ECB President Christine Lagarde would keep her promise (…) to act against ‘excessive fragmentation’ “if necessary 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.”
Like the ECB, it faces the enormous challenge of trying to raise rates and withdraw years of stimulus without causing a recession. But it must take into account only one economy.
“The additional challenge for the ECB is that its policies affect borrowing costs in 19 economies with different fundamentals,” Schmieding commented.