The European Central Bank is trying to ease fears of a credit crunch after the bond ‘panic’

At its regular meeting last week, the ECB Confirmed plans He said raising rates by 25 basis points in July – its first rise in 11 years – would help tackle inflation and, if necessary, a big rise in September. It also said it would stop buying European government bonds.

Those plans drastically increased borrowing costs in countries in southern Europe, This led to calls for the central bank to provide more details on how to block the eurozone bond market.

In return Sharp market sales, Which recalled more than a decade of the region’s debt crisis, prompted the central bank to hold a rare, unplanned meeting on Wednesday. To alleviate the crisis, it promised to use money from maturity bonds purchased as part of its epidemic emergency purchase plan or PEPP.

“The Governing Body decided to use the flexibility in reinvesting forthcoming returns in the PEPP portfolio to protect the functioning of the monetary policy exchange mechanism,” it said in a statement after the extraordinary meeting.

The gap between the yields of 10-year German and Italian government bonds was the widest since March 2020. Earlier this week, according to Tradeweb. The spread between German and Greek ties has expanded recently.

Capital economies say earnings on 10-year Italian bonds fell slightly below 4.3% on Tuesday, down slightly from the news of an emergency ECB meeting.

“The ECP’s carefully crafted strategy is to end property purchases, then raise rates, starting with small increments and accelerating if necessary,” said Kit Jax, a Society general strategist. “This strategy is in all sorts of trouble today.”

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

‘Panic around’

Europe is in a better position than it was last time the ECB raised rates in 2011.

The Greek economy, in particular, is beating growth expectations, and it has favorable conditions on its debt, which makes repayment worry-free. But that is not the case in Italy, whose responsibilities need to be refinanced soon, and growth is being dragged out.

“Italy has not made enough radical reforms,” ​​said Holger Schmidt, chief economist at Bank of Bernberg.

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

“As memories of the European debt crisis are still fresh, ECB President Christine Lagarde is being asked how and under what circumstances to deliver on the promise … to act against ‘excess fragmentation’ if necessary after the completion of net asset purchases,” Schmidt said in a note on Wednesday. It’s time to dump her and move on. “

The US Federal Reserve It convenes on Wednesday to discuss interest rates, and is widely expected to raise US rates by three-quarters, which it has not done since 1994.

Like the ECB, it faces a major challenge, such as trying to raise rates and withdraw incentives over the years without causing a recession. But it should only take into account one economy.

“An additional challenge for the ECB is that its policies affect borrowing costs in 19 economies with different fundamentals,” Schmieding commented.

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