The European Central Bank (ECB) is transferring money from Germany, the Netherlands and France to Italy, Spain, Greece and Portugal to contain risk premiums – to prevent the spread between interest demanded in the market on debt from increasing. of these countries with respect to that of Germany, considered the guarantor State of the eurozone, or what is the same, the best payer or the safest–.
The institution chaired by Christine Lagarde is reinvesting, without conditionality, almost all the income it collects from the maturities of the bonds of the northern countries that it has in its portfolio in the southern countries, which are more over-indebted and suffer more generalized hardening and hardening of financing, after the first rise in official interest rates since 2011 just a few weeks ago, which has the objective of stopping fueling inflation.
In addition, with the same purpose of curbing price increases, in June it ended the bond purchase programs with which it has created money for years to guarantee the demand for the debt of the States, as well as of companies and families in the eurozone. And with those who, first, favored the economic recovery after the Great Financial Crisis and, later, helped to cope with the COVID shock.
According to data from the ECB itself (see graph above), in June and July it has used the maturities of those bonds that it has been acquiring to prevent the cost of financing from increasing much more, precisely, in the most vulnerable countries of the south – to avoid what in financial jargon has been called the fragmentation of the market and that translated would be a debt crisis similar to that of 2010–.
In this way, the institution that directs the monetary policy of the eurozone is implicitly treating Germany, the Netherlands and, to a lesser extent, France. as "donor" countries, while Greece, Portugal, Italy and Spain are being "recipients". Thus, the ECB is transferring the money it has manufactured during this time from north to south – of course, it also buys debt from the latter with the maturities of its own bonds – and is achieving the difficult balance of tightening financing conditions to stop fueling runaway inflation without particularly harming these states with the most fiscal imbalances.
The following graph shows how Spain's risk premium (with data up to this Tuesday, August 9) has relaxed since the peak of tension it suffered in June, despite the threat of a cut in Russian gas and even of a recession. This is the main consequence of the ECB's decisions.
The uncertainty arises because these reinvestments of maturities, which the same institution warned would be "the first line of defense" against market fragmentation, may not be enough. Or, worse, end up raising blisters among the members of the euro club if the most fiscally disciplined countries consider that the institution is abusing its self-imposed flexibility and excessively favoring the countries of the south without demanding reforms – and here is the threat of austerity that could stifle growth altogether in a context where they are needed stimulus both to overcome the impact of the pandemic and the war and inflation–.
In fact, the ECB has designed a second tool that does involve conditionality, the TPI (Instrument for the Protection of the Transmission of monetary policy, for its acronym in English). A mechanism that the institution can activate when it deems it necessary and that would allow it to manufacture money again and buy debt from a specific country if it meets certain requirements – fiscal sustainability, not having an "excessive" deficit, or "severe" imbalances... austerity , definitely-.
Javier Pino, an analyst at AFI, considers that "the ECB is putting the money where it had really told us: the first line of defense was the reinvestment of the purchase programs to contain the increase in spreads [las primas de riesgo]and it's good news that it's working."
"If you can contain [las primas de riesgo] with this tool, the TPI will not be necessary", he continues. "The key to these reinvestments is flexibility, although in the long term it will tend to comply with the capital key of the ECB itself [la medida proporcional de la deuda que puede comprar de cada Estado de la eurozona]from which it is temporarily deviating, without specifying for how long, which gives it even more margin," he adds.
Víctor Alvargonzález, founding partner of Nextep Finance, points out that the institution has found the loophole "in that they are not creating money, but are reinvesting" previously made money, and in this way everything "that is maturing in Germany, the Netherlands... is being reinvested in Italy and Spain".
"Can it always work? As long as the pressure from peripheral bond sales is not excessive... In an official and designed purchase program, the ECB controls the money it creates according to need. Now it depends on the income it has from maturities "explains this expert.
What if there was a bigger trust issue or a speculator attack? "The maturities may not be enough...", regrets Alvargonzález, who recalls that, "legally", buying debt from only two countries [Italia y España] it has been difficult for a long time to fit into the eurozone, and that "morally" this type of risk premium control would be institutionalized.
The other question is at what level of the Italian or Spanish risk premium the ECB would see the TPI as necessary. "The reference is what happened in June [en el gráfico se ve el caso de España]but it is difficult to know", concludes Javier Pino.
The ECB's action is just one of the differences in the current situation with respect to the 2010-2012 euro crisis, despite the greater over-indebtedness of the eurozone economies after the COVID shock.
The situation is different because the will of the European institutions has indeed changed and, above all, because the unbeatable financing conditions of recent years mean that interest bills for each year are generally much lower (close to 2% compared to to 3.7% of 2013, in the case of our country), and that the forecasts do not see them much higher in the medium termeven though a rate hike cycle has begun.
Meanwhile, economic activity continues in full recovery, despite the brakes caused by the war and inflation itself, with Spain leading the growth rates in the EU, as the recovery funds are deployed.
In a context like the current one, of a general tightening of financing conditions (also of mortgages and all types of loans), it is not only important that Spain start from a cost at historic lows, but also to have achieved an average maturity in maximums.
Spain would have 8 years to renew all its debt, compared to 7 years for Italy and Portugal. Our country has taken advantage of the ECB's support to lengthen the life of its debt as a whole, which is known as average maturity. This is a clear argument for stability: there is time to refinance the different bonds without having to make great efforts at the worst moment, as happened in 2012, when bonds were issued at more than 5% in the primary market. The benchmark bond, 10 years, is now at 2%.