The European Central Bank calls an unplanned meeting on the bond market “panic”

The bank would hold the “ad-hoc” meeting to discuss “current market conditions”, according to a spokesman for the central bank. The meeting was supposed to begin at 05.00 ET.

The ECB left interest rates unchanged at its regular meeting last week, but confirmed plans to increase borrowing costs by 25 basis points next month – its first 11-year rate hike – and said a larger rise could follow in September “if the medium-term inflation outlook persists or worsens. ” 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 generally expected to raise US interest rates by three quarters of a percentage point, something it has not done since 1994.

Plans by the ECB to raise interest rates and end years of supporting the economy through bond purchases have pushed up borrowing costs sharply in some of Europe’s most debt-ridden countries, prompting calls on the bank to provide more details on how it proposes to prevent the eurozone. fragmentation of the bond market.

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

10-year Italian interest rates fell slightly on the news of the ECB emergency meeting, falling to just under 4% from 4.3% on Tuesday, according to Capital Economics.

“The ECB’s carefully communicated strategy was to end asset purchases, then raise interest rates, start small and accelerate if necessary,” noted Societe Generale strategist Kit Juckes. “This strategy is in all sorts of trouble today when the ECB meets to discuss their anti-fragmentation policies and tools.”

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

“Panic in the periphery”

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

Greece’s economy in particular has beaten expectations for growth, and it has favorable debt ratios that make repayment less worrying. But this is not the case in Italy, which will need to refinance its commitments earlier, and where growth has slowed.

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

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

“With memories of the European debt crisis still fresh, investors are asking how and under what circumstances ECB President Christine Lagarde would fulfill her promise … to act against ‘excessive fragmentation’ if required after the purchase of net assets,” Schmieding wrote in a note on Wednesday entitled “Panic in the periphery: time for the ECB to show its hand.”

The ECB has said it will step in and resume bond purchases if the situation worsens rapidly. But exactly when it will intervene is not clear, which makes investors increasingly nervous.

“The ECB can contain the problem if they want to,” said Andrew Kenningham, Europe’s chief economist at Capital Economics earlier this week. But they have not posted their “pain limit”, he added.