The new normality, in which the European Central Bank (ECB) tried to withdraw the assisted breathing with which it has kept the euro zone economy running for two crises, has not lasted even a week. Since the announcement of the new measures, last Thursday, the spreads of Italy, Greece, Spain and Portugal continued to widen against the German 10-year bond, the Bund, so that the Italian risk premium had climbed to 242 and the Spanish until 135.
Faced with the danger that the debt would spiral out of control like that of the summer of 2012, Christine Lagarde called this Wednesday an extraordinary meeting of the Governing Council of the ECB, with as little notice as had never been seen before since the foundation of the institution and that forced several of the Council members to be rushed from Milan, where they were scheduled to attend a conference.
After the meeting,
the ECB issued a statement informing about the decision to “apply some flexibility in reinvestment” of the bonds of its emergency program launched during the pandemic (called PEPP) and design a new "anti-fragmentation" instrument to combat the divergence of interest rates within the euro area.
This means that, as the bonds that the ECB has been buying all these years and still has in its portfolio mature, 300,000 million in Spanish bonds purchased in the last two years alone, it will reinvest that money by making new debt purchases, no longer indiscriminate, but focused on those debt markets that are most stressed. The ECB will continue to buy debt from countries on the verge of bankruptcy.
It has also put its teams to work at full steam to design a newly created instrument with which to convince the markets that its program of interest rate hikes, the first of 0.25% in July and another in September of equal or greater significance, is compatible with the fight against the excessive difference in borrowing costs between the northern and southern countries of the euro zone.
Christine Lagarde, president of the ECB, pointed out this Wednesday that "crises are never the same twice" and that it is necessary "to have the courage to act when the facts are not clear." "We can't just be bold, we must also be consistent," she added, recalling that the ECB must be true to the spirit, not just the letter of the mandate.
All the experts agree that the situation, as of today, is still a long way from that of the summer of 2012 -the financial crisis-, but they also agree that this statement does not even reach the bottom of the shoe for «whatever it takes » («whatever is necessary») with which Mario Draghi, then president of the supervisor, managed to bridle the debt markets.
"After the 'show' of an extraordinary meeting, which pointed to an unprecedented reaction from the ECB, it did not announce a comprehensive tool to combat spreads that could provide a permanent solution to the problem," complain the experts at Jack Conomics, who add that “the immediate easing we have seen in bonds will quickly turn into market pressure for the ECB to comply with a tool we still know nothing about.”
This new instrument "could take different forms, such as a purchase package similar to the pandemic PEPP or as an unlimited support instrument similar to the OMT," they point out from A&A, adding: "In the first modality, the global size and the purchases could start shortly, just like the PEPP it could be easier to deviate from capital keys with little conditionality, although it would not be indefinite; while in the second modality it could be an unlimited 'backstop', a more effective option, and produce a drop in spreads just by announcing it, without the need to activate it until it is really necessary, as Draghi did».
In the latter case, the perverse effects on inflation, already quite overheated by itself, would be avoided at least for the time being. Because if Lagarde had announced the end of the cheap money party, it was precisely because prices threaten to eat up the limping economic growth recovered after the pandemic. If it now buys debt again, prices in the affected countries will continue to rise.
“Basically, they have sent a notice to the market that they are preparing to prevent risk premiums from getting out of control and that they are doing so by commissioning anti-fragmentation contingency plans from the relevant internal committees,” explains Víctor Alvargonzález, director of strategy at Nextep Finance. , which adds that "they are showing their teeth to investors who are betting that risk premiums will skyrocket".