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ECB Presents a United Front Amid Confusion Over Approach to Crisis

The European Central Bank scrambled Wednesday to reassure investors it would back Italy’s government as it combats the spreading coronavirus, intervening in Italian debt markets via Italy’s central bank and dialing back a top official’s remarks suggesting the ECB would do little more.

The twin moves underscore the grave threats facing European policy makers, who are struggling to present a coordinated response to a fast-moving global crisis whose epicenter has shifted to Europe.

A person familiar with the matter said Wednesday that the ECB was intervening in Italian sovereign bond markets via the Bank of Italy in order to avoid disruptions.

“It has intervened in a flexible but intense way due to the volatility of markets,” the person said. The ECB declined to comment.

Yields on Southern European sovereign bonds have jumped in recent days after two senior ECB officials separately suggested that the bank was unwilling to do more to support the region’s struggling economy.

Earlier Wednesday, the ECB reiterated its readiness to step up stimulus policies if needed after Austrian central-bank governor Robert Holzmann suggested in an interview that investors had rightly assumed the ECB would take little further action.

ECB officials agreed unanimously that the bank “stands ready to adjust all of its measures, as appropriate, should this be needed,” it said in a statement.

Mr. Holzmann is seen as one of the more hawkish members of the ECB’s 25-member governing council, which sets interest rates for the eurozone. A spokesman for Mr. Holzmann declined to comment further on his remarks.

Italy’s 10-year government bond yield rose above 3% on Wednesday for the first time in more than a year, before drifting down after the Bank of Italy’s interventions. The Greek equivalent traded above 4.1% compared with less than 1% several weeks ago.

“This is the perfect storm,” said James Athey, an investment manager at Aberdeen Standard Investments. “Liquidity has essentially evaporated, the BTP [Italian government bond] market has essentially broken today. There are basically no bids and a lot of sellers.”

The ECB’s move comes days after ECB President Christine Lagarde stressed that the bank was ” not here to close spreads,” meaning it wouldn’t intervene to narrow the difference in borrowing costs between Germany and Italy.

That comment stunned investors, and the ECB sought quickly to redirect it. It called into question the central bank’s carefully crafted role as an effective lender of last resort to eurozone governments. The ECB is prohibited under European treaties from financing governments, but European courts have supported its right to use bond purchases to calm markets.

In a confusing twist Wednesday, Mr. Holzmann said investors had correctly interpreted Ms. Lagarde, and that a correction in stock markets was overdue.

“Once the markets saw that Ms. Lagarde was serious, and there was unanimity about it in the Governing Council, they realized, we can’t maintain our excessive levels in stock markets,” Mr. Holzmann told Der Standard, an Austrian newspaper.

The comments underscore divisions among top ECB officials, some of whom are increasingly eager to end a long period of easy money.

The ECB delivered a modest stimulus package last week, eschewing interest-rate cuts and other shock-and-awe policies adopted by major central banks including the Federal Reserve.

Mr. Holzmann said it would have been impossible for the ECB to meet market expectations, and suggested that a downturn in Europe might have a positive, cleansing effect on the economy by eliminating businesses that aren’t viable.

“One should be careful that only the firms capable of surviving do survive, and that others that would have failed even without a crisis don’t survive,” he said.

Some longtime ECB watchers were shocked by the comments.

“This is nothing short of a disaster,” tweeted Frederik Ducrozet, an economist with Pictet Wealth Management in Geneva. “We all need the unambiguous support of the central bank right now.”

The ECB’s relative caution reflects its limited room for maneuver, with its key interest rate already below zero. But it also reflects a division between ECB officials who believe the bank should do more to support struggling member countries, and others who worry about the long-term impact of easy money.

Mr. Holzmann suggested that the ECB has already kept low-rate policies in place for too long. “Six years is a bit too long for negative rates,” he said.

Source: Dow Jones

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