The European Central Bank will act to ease tensions over sovereign debt

The European Central Bank (ECB) tried to regain control of the borrowing costs of eurozone states on Wednesday, announcing new measures to remove the specter of a sovereign debt crisis and not not compromise its anti-inflation policy.

One week after the announcement of a tightening of their monetary policy, euro keepers had to meet urgently on Wednesday morning to convince markets that their rate hike program was compatible with the fight against too large gap in borrowing costs between northern and southern eurozone countries.

Also read: The ECB will end the era of negative rates

Following these new discussions, the Governing Council undertook two measures: “apply some flexibility in reinvestment” of its Pandemic Emergency Program (PEPP) obligations and design a new “anti-fragmentation” instrument to combat this divergence of rates within the euro area.

The beginning of a cycle of rising rates

For example, the ECB will be able to reinvest more in repayment of overdue loans for fragile countries, such as Italy, and less to reinvest in overdue German securities, which have the most favorable market conditions for borrowing. No details were given on the content of the future anti-fragmentation instrument or its timetable for adoption.

Also read: Yanis Varoufakis: “Interest rates need to be raised to 3%”

At least all observers have been waiting for the ECB to say more about how it intends to respond to the growing turmoil in the sovereign debt market since it announced the end of the money era a week ago. abundant and cheap.

After all the other major central banks, the Frankfurt institution has in fact planned the start of a cycle of rising interest rates to fight inflation, the first since 2011.

Change of direction

The institution will raise its key interest rate by 25 basis points at its next meeting on July 21, after halting its net asset purchases. Its chairwoman Christine Lagarde also warned that there would be a new round of rate hikes from September, the amount of which worries investors.

Also read: Euro 2.0 debt: a time bomb?

This major change in monetary policy is accompanied by a risk: a fragmentation of the sovereign debt market in the euro area, which would make European states borrow at very different levels, those considered the most fragile being penalized because investors are demanding higher risk premiums.

In the spotlight: the specter of a new sovereign debt crisis, ten years after the one that had almost proved right about the unity of the eurozone.

Following the announcement of the turnaround, the reaction on the bond market was immediate and the spread spread between Italy, Greece, Spain and Portugal. at the German 10-year borrowing rate – the Bund – which refers.

Agreement in July?

ECB officials have repeatedly stressed that they are ready to intervene urgently in recent weeks, including shaping a new monetary instrument, but many observers have lamented the lack of a concrete solution presented by the ECB. institution.

“We will not tolerate changes in financing conditions that go beyond the fundamentals” of eurozone countries that would see their borrowing costs skyrocket, said Isabel Schnabel, a member of the board of directors. the ECB, in a speech in Paris.

With its more concrete communication on Wednesday, the ECB said “what the markets needed to hear, finally!” Tweeted Frederik Ducrozet, chief economist at Pictet Weath Management. Wednesday’s meeting “did not announce a comprehensive spreadsheet tool that could provide a permanent solution to the problem,” said Jack Allen-Reynolds of Capital Economics.

Save time

“PEPP’s flexible reinvestment could save policymakers some time, but the new ‘anti-fragmentation instrument’ the Bank is working on will have to go much further,” he added. consensus on this tool has not yet been achieved within the ECB.

The issue is also expected to be addressed at a meeting of eurozone (Eurogroup) eurozone ministers in Luxembourg on Thursday, attended by the ECB.

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