The ECB dog that did not bark - what it will do to stop the euro zone fragmenting
Mindre tydligt var hur ECB ska hantera Sydeuropas statsskuldräntor när stimulanskranarna skruvas åt.
Gapet mellan tyska och italienska 10-årsräntor vidgades ytterligare på torsdagen till den största så kallade spreaden på två år.
Christine Lagarde betonade vid pressträffen att ECB har beredskap att agera för att säkra en sammanhållen ränteutveckling i unionen. Men hon kunde inte gå in på hur det ska gå till.
Nils Åkesson DI 9 juni 2022
https://www.di.se/nyheter/lagarde-snitslar-banan-mot-jumbohojning/
A severe “fragmentation” in member states’ borrowing costs would mark a return to the days before the ECB began buying bonds in 2014 — a time when the threat of a debt crisis in more vulnerable member states risked triggering a break-up of the currency area.
But most council members agreed there was no point trying to design a new instrument to tackle this risk until it materialised, because it could be blocked by the ECB’s own lawyers for not being “proportionate” or attract a challenge in Germany’s constitutional court.
FT 10 June 2022
https://www.ft.com/content/db40b88e-950a-4b28-839a-2b7cf1bfacd4
Europe Bond Risk Near ‘Danger Zone’
A selloff in Europe’s weakest bond markets piling pressure on ECB to make clearer how it plans to keep diverging borrowing costs contained.
“Such a vague approach towards creating a backstop on spreads means that the European government bond market must first shift into crisis mode and unwarranted spread widening before the ECB acts,” wrote Jorge Garayo, rates strategist at Societe Generale SA.
The rout also spread to Greek debt
For some strategists, there’s a risk that more indebted nations could be put under so much pressure by increased borrowing costs it will force the ECB to stop hiking altogether.
Bloomberg 10 June 2022
Most important was the ECB’s failure to offer any guidance on what it will do to stop the euro zone fragmenting as economies suffer differently from increasing rates.
Lagarde’s most memorable comment in her time in office continues to be her protest in 2020 that “we are not here to close spreads” — a comment that helped spreads of Italian and Spanish bond yields compared to bunds to rise sharply.
This time, saying that the ECB would develop tools as needed to deal with fragmentation, but the markets plainly found it very disconcerting that there was no explicit plan to keep the euro zone together.
Italy’s economy is relatively weak, and it has a huge amount of debt in circulation. Rising yields reawaken the fear that it will not be able to repay its debt — which in turn implies that the euro zone will have to fragment.
That brings back bad memories of the sovereign debt crisis that peaked almost exactly a decade ago when Mario Draghi promised to do “whatever it takes” to ensure that the euro survived.
It’s time to return to an acronym that had been retired: the PIIGS, named after Portugal, Ireland, Italy, Greece and Spain.
If markets lost confidence in a country’s credit, they sent its borrowing costs up beyond anything it could pay, and forced a decision between some kind of bailout or a default.
Greece, Ireland and Portugal all received bailouts, on onerous terms that required protracted austerity.
Greece went on to have another traumatic conflict with the core of the EU in 2015, which came to the point of closing down its banks for two weeks.
Italy and Spain, the third and fourth largest economies in the single-currency zone, were too big to be allowed to fail.
Note that before the Great Financial Crisis, GFC, in 2008, the region was perceived to be a unit, and Italian and Spanish debt was held to be as strong as Germany’s.
Draghi managed to save the euro zone 10 years ago, but he didn’t manage to restore the assumption that all EU nations’ debt could be treated as equally strong.
That left an enduring weakness, which has now reared its head.
The ECB is expected to come up with another such mechanism, and if it doesn’t the pressure on peripheral debt will continue.
The market needs to force politicians into action before anything can happen.
New ECB tools need to be judged as “proportionate” to be legally durable and it is easier to judge proportionality in response to a problem than in advance. The lack of progress does not mean a new tool is less likely, but market pressures are likely to have to build first.
- Den stora risken var att Grekland skulle utlösa en kris i italienska, franska och tyska banker.
Nu finns i praktiken en EU-garanti för de utestående grekiska statsobligationerna.
Anders Borg, TT februari 2012
Beräkningar visar att Grekland kan behöva ännu mer miljardstöd framöver och att de förhoppningar om att statsskulden ska ner till 120 procent av BNP till 2020 inte kommer att hålla.
– Då har naturligtvis Grekland stora problem, men det är en väldigt skillnad om hela Europa har problem, säger Borg.
DN 2012-02-21
Under the ECB's whatever-it-takes monetary policy to save the euro,
an estimated €4.4 trillion ($4.6 trillion) has been pumped into stabilizing the bond yields of heavily indebted countries in the eurozone's southern periphery.
This figure was recently published by the ZEW think tank in Mannheim, Germany.
The lion's share of the ECB's asset purchases since the eurozone 2010 sovereign debt crisis were bonds from Spain, Portugal and Italy, the organization found.
DW Business editor Henrik Böhme 9 June 2022
https://beta.dw.com/en/opinion-europes-monetary-policy-shift-comes-too-late/a-62083231
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