Black Friday is Now! Don’t miss out on up to 60% OFF InvestingProCLAIM SALE

ECB pledges new crisis tool to help indebted southern states

Published 06/15/2022, 01:40 AM
Updated 06/15/2022, 01:56 PM
© Reuters. FILE PHOTO: The European Central Bank (ECB) logo in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski/File Photo

By Balazs Koranyi and Francesco Canepa

FRANKFURT/MILAN (Reuters) - The European Central Bank promised fresh support for the bloc's indebted southern rim on Wednesday, tempering a market rout that threatened a repeat of the debt crisis that almost brought down the single currency a decade ago.

Government borrowing costs have soared on the 19-country currency bloc's periphery since the ECB unveiled plans last Thursday to raise interest rates to tame painfully high inflation.

But the bank failed to reassure investors it would contain the rise in borrowing costs, making only a vague pledge and stoking fears it was abandoning more indebted nations, such as Italy, Spain and Greece, which have struggled for years under the weight of massive debt piles.

Reversing course just six days later, the ECB said it would direct cash to more indebted nations from debt maturing in a recently-ended 1.7 trillion euro ($1.8 trillion) pandemic support scheme and it would work on a new instrument to prevent an excessive divergence in borrowing costs.

"The Governing Council decided to mandate the relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council," the ECB said after an extraordinary meeting.

But ECB chief Christine Lagarde also tried to temper expectations, arguing that the ECB's job is taming inflation, not helping budgets.

"We cannot surrender to fiscal dominance," Lagarde said at a forum in London. "Neither can we surrender to finance dominance; we have to deliver on our mandate."

Dutch central bank chief Klaas Knot said that policymakers instructed staff to work at an accelerated pace on the new tool, in case sending reinvestments south were not enough.

"If it will not be enough, rest assured that we stand ready," Knot told a conference.

BARE MINIMUM?

The ECB's statement calmed markets but left many underwhelmed.

"I think essentially it is the bare minimum of what could be expected, but I also believe it's the most realistic outcome of what they could compromise today," Danske Bank economist Piet Christiansen said.

Holger Schmieding, an economist at Berenberg meanwhile argued that the ECB was merely correcting last week's mistake.

"Last Thursday, such words would probably have made a decisive and possibly lasting difference," he said. "But after the turmoil of the last few days, markets are now more nervous than before. The ECB thus faces a bigger risk that markets may test the ECB’s resolve again soon."

The announcement also drew fire from those who argued the ECB risked going too far.

"The ECB’s job is to deliver on price stability, not to ensure favourable financing conditions," Markus Ferber, a German conservative member of the European Parliament said. "Some countries now simply get the bill for years of irresponsible fiscal policies."

"If the ECB now launches yet another programme to keep spreads low, it edges dangerously close (to) monetary state financing," Ferber said.

The euro fell close to 1% against the dollar after the ECB statement but Italian yields eased to comfortably below 4%.

The spread between 10-year Italian and German bonds, a key indicator, meanwhile eased to around 222 basis points from close to 250 basis points on Tuesday, indicating confidence that the ECB will eventually act more firmly, perhaps at the July 21 policy meeting, when it is all but certain to raise rates for the first time in over a decade.

There is no universally accepted level for this spread, but Carlo Messina, the CEO of Intesa, Italy's largest bank, earlier on Wednesday said the country's economic fundamentals would justify 100 to 150 basis points.

The spread on 10-year Spanish bonds was meanwhile little changed at 126 basis points while for Greece, was around 262 basis points, broadly in line with its level before the ECB statement.

© Reuters. FILE PHOTO: The European Central Bank (ECB) logo in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski/File Photo

The ECB's move comes on the same day that the U.S. Federal Reserve is expected to hike interest rates, with investors dramatically raising their bets for a 75 basis point increase, a swing in expectations that has fuelled a violent sell-off across world markets.

($1 = 0.9542 euros)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.