Home / World Economy / World Economy News / ECB will deploy new anti-fragmentation tool if needed, Lagarde says

ECB will deploy new anti-fragmentation tool if needed, Lagarde says

The European Central Bank will deploy new tools if needed to avoid fragmentation across euro zone government bond markets as it begins to tighten monetary policy, ECB President Christine Lagarde said.

But she provided no details of what they would be or when they would become necessary, in another sign that the ECB is not overly concerned yet.

Borrowing costs have rapidly diverged between safe-haven Germany and highly indebted Southern European states as markets have priced in an unwinding of the ECB’s long-running stimulus.

The interest premium investors charge to hold debt of Italy and Greece compared with Germany, known as the spread, has risen by 90 and 120 basis points respectively this year, already their largest annual rises in years.

The ECB’s announcement that it would end its Asset Purchase Programme on July 1 before raising interest rates later next month caused those spreads to widen further on Thursday. Italy’s rose to as much as 226 bps, near its highest since the height of the COVID-19 pandemic in 2020, as the yield on its 10-year bond surged over 15 basis points.

The APP, introduced in 2014 to avert potential deflation, has been a key factor that has held down borrowing costs in the bloc’s highly indebted states.

“If it is necessary, as we have amply demonstrated in the past, we will deploy either existing adjusted instruments or new instruments that will be made available,” Lagarde told a news conference.

“But we are committed – committed – to proper transmission of our monetary policy and as a result fragmentation will be avoided to the extent that it would impair that transmission.”

The ECB had already pledged to fight “unwarranted” fragmentation between member states and Lagarde emphasized on Thursday that such divergence in yields would obstruct the ECB’s potential to “achieve its price stability mandate”.

The ECB has said its policy will include “flexibility” under stressed conditions and has committed to choosing where it reinvests proceeds from maturing bonds held under its Pandemic Emergency Purchase Programme (PEPP) in the event of stress.

Pressed for details on when such flexibility would kick in, Lagarde said: “There is no specific levels of yields increase, or lending rates or bond spreads that can unconditionally trigger this or that. “We will determine on the basis of circumstances, of countries, how and when that risk is likely to materialize and we will prevent it,” she added.

“Lagarde gave nothing new about how to address fragmentation, which also sent the BTP-Bund spread wider,” said Piet Christiansen, chief analyst at Danske Bank.

After the ECB stopped adding new bonds to its PEPP holdings in March, buying of Italian debt under the programme fell across April-May. Analysts said that shows the ECB has not adjusted reinvestments across states, indicating that it is not yet uncomfortable with spreads.

A source close to the discussions told Reuters before the meeting there had been no agreement or progress on an anti-fragmentation tool, pointing out that real bond yields were still low and an announcement might be taken by markets as a sign of fear.

Signs of fragmentation are closely watched by investors, who remember the debt crisis a decade ago that almost broke apart the 19-country euro zone.
Source: Reuters (Reporting by Yoruk Bahceli and Francesco Canepa; Editing by Catherine Evans)

Recent Videos

Hellenic Shipping News Worldwide Online Daily Newspaper on Hellenic and International Shipping