The European Central Bank calls an extraordinary meeting to tackle the crisis in the bond market amid the echoes of the debt crisis

A rare and unscheduled meeting to discuss the explosion of borrowing costs for some eurozone countries

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FRANKFURT/MILAN – European Central Bank policymakers will hold a rare, unscheduled meeting on Wednesday to discuss an explosion in borrowing costs for some euro zone countries, fueling speculation that the bank may be preparing to act to calm markets.

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Bond yields issued by Italy and other heavily indebted countries have risen sharply since the European Central Bank raised a series of interest rate hikes last Thursday and halted its debt purchase program in the face of rising inflation.

Faced with the threat of a repeat of the debt crisis that nearly sent the single currency down a decade ago, the European Central Bank’s policymaking board has been meeting to discuss how to respond to the recent market turmoil.

Investors have pushed the spread between German bond yields and those of the more indebted southern states to their highest levels since the height of the pandemic two years ago – a sign of waning confidence in those countries.

An ECB spokesman said: “The Governing Council will hold a special meeting on Wednesday to discuss current market conditions.”

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News of the European Central Bank meeting sent the euro up more than half a percent to 1.0487 against the dollar, Italian 10-year bond yields fell 22 basis points and Italian stock futures rose sharply.

People familiar with the matter said the meeting began at 0900 GMT and was likely to be followed by a statement in the early afternoon.

Options open for the ECB to fight so-called fragmentation — when some countries face significantly higher borrowing costs than others — include redirecting investments from maturing bonds to stressed markets.

But some analysts cautioned that such a move alone is unlikely to be enough, so ECB policymakers could also devise an entirely new tool. Sources told Reuters before the meeting that work on a project started earlier this year but that no progress had been made since April.

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Invitations to the meeting were sent out on Tuesday and some policymakers, who were expected to attend a conference in Milan on Wednesday, canceled their appearances.

The meeting comes on the same day that the US Federal Reserve is expected to raise interest rates, as investors dramatically raise their bets for a 75 basis point increase, a swing in expectations that led to a violent sell-off in global markets.

Earlier, German 10-year yields, a benchmark for the 19-nation currency union, reached 1.77 percent, the highest level since early 2014 while their Italian counterparts jumped 240 basis points, the largest spread since early 2020.

Italy sold 2.5 billion euros of seven-year bonds due on June 15, 2029 for a total return of 3.75 per cent – the highest since October 2013 and a sharp increase from 2.39 per cent in the previous auction.

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The debt crisis ended only a decade ago when President Mario Draghi pledged to do “whatever it takes” to save the euro and followed that promise with an unprecedented – and hitherto unused – rescue plan.

There were echoes of Draghi’s tone in a speech delivered by European Central Bank Governing Council member Isabel Schnabel late Tuesday.

“Our commitment to the euro is an anti-fragmentation tool,” said Schnabel, who is German. “This commitment has no limits. Our track record of intervening when needed supports this commitment.”

She added that the ECB was monitoring the situation “closely” and was ready to deploy existing and new instruments if it found market repricing was “disorderly”.

But Schnabel argued against preemptive advertising for a tool because it would need to be adapted to a particular situation with terms, limits, and guarantees set on a case-by-case basis.

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“We should get a statement along the lines of reflecting the willingness to act, and then maybe they also commission committees to work on options, which has been missing in the last week,” said Frederic Ducruzette, economist at Pictet Wealth Management.

The last time the European Central Bank held an off-plan meeting during market pressures, it rolled out the Pandemic Emergency Purchase Program (PEP), a €1.7 trillion (US$1.78 trillion) bond-buying scheme that has proven to be its key tool during the COVID-19 pandemic.

© Thomson Reuters 2022

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