European Central Bank calls for unscheduled bond market meeting ‘panic’

The bank will hold a “special” meeting to discuss “current market conditions,” according to a central bank spokesperson. The meeting was scheduled to begin at 5 a.m. ET.

The European Central Bank left interest rates unchanged at its regular meeting last week, but confirmed plans to raise borrowing costs by 25 basis points next month – the first rate hike in 11 years – and said a larger increase could follow in September “if the average-continuation or deterioration of the term inflation expectations”. It also said it would stop buying European government bonds.
The US Federal Reserve is also currently meeting to discuss interest rates, and it is widely expected to raise US interest rates by three-quarters of a percentage point, something it hasn’t done since 1994.

European Central Bank plans to raise interest rates and years of supporting the economy with bond purchases have sent borrowing costs up sharply in some heavily indebted European countries, leading to calls for the bank to provide more details about how it proposes to block the eurozone. Bond market fragmentation.

The gap between yields on German and Italian 10-year government bonds was at its widest since March 2020 on Monday, according to Tradeweb. The spread between German and Greek bonds has also widened recently.

Italian 10-year yields slipped slightly after news of the European Central Bank’s emergency meeting, falling to just under 4% from 4.3% on Tuesday, according to Capital Economics.

“The ECB’s carefully communicated strategy has been to end asset purchases, then raise rates, starting with small increments and accelerating if necessary,” said Kit Juckes, strategist at Societe Generale. “This strategy gets into all kinds of trouble today as the European Central Bank meets to discuss its policy and anti-fragmentation tools.”

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

Panic in the ocean

Europe is in better shape than it was the last time the European Central Bank started raising interest rates.

The Greek economy, in particular, has been outpacing growth expectations, and has favorable conditions on its debt that make repayment less worrisome. But that is not the case in Italy, which will need to refinance its liabilities sooner, and where growth has been slowing.

“Italy has not done enough serious reforms,” ​​said Holger Schmieding, chief economist at Berenberg Bank.

The turmoil in the bond market since last Thursday’s European Central Bank meeting has added to the pressure on the bank.

“With memories of the European debt crisis still fresh, investors are wondering how and in what circumstances ECB President Christine Lagarde will make good on her promise… to act against ‘excessive fragmentation’ if necessary after the end of net asset purchases,” Schmieding wrote in a note on Wednesday. Titled “Panic in the Limbs: It’s Time for the European Central Bank to Show Its Hand”.

The European Central Bank said it will step in and resume bond buying if the situation deteriorates rapidly. However, it is not clear exactly when he will step in, which is making investors increasingly anxious.

“The European Central Bank can contain the problem if it wants to,” Andrew Kenningham, chief European economist at Capital Economics, said earlier this week. He added that they had not set a “pain threshold”.

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