The leadership of the European Central Bank (ECB) has agreed this Wednesday to speed up the design of a new instrument to curb future sovereign debt crises in the euro zone. The decision was taken at an emergency meeting called in response to the rise in risk premiums in southern European countries, particularly Italy, which occurred after the announcement of interest rate hikes last week. In a statement, the Governing Council of the institution chaired by Christine Lagarde has decided to indicate the two steps it has decided to take to stop this fragmentation. Immediately, the ECB has decided to reinvest the debt maturities of the extinct program to combat the pandemic (PEPP, in its acronym in English) with “flexibility”. In other words, this portfolio, which amounts to 1.7 trillion euros, can be allocated above all to the countries that are most affected by market attacks, including Greece.
The markets this time wanted facts. They were not convinced by Lagarde’s speech last Thursday, who warned that she would not tolerate an attack on sovereign debt like the one in 2012. With a more aggressive tone and a path of rate hikes ahead, the markets immediately baited on the debt of the countries of southern Europe. In particular, on that of Italy, which in just six months faces key elections for Europe. The cost of debt soared throughout the south: in Greece on Tuesday it had exceeded 4.5%; in Italy, 4%, and in Portugal, 3%. In Spain it also climbed to 3%, the highest level since 2014. Faced with this situation, Isabel Schnabel, a member of the ECB executive, came out to warn again that the Eurobank would do everything in its power to stop the divergence in the markets of debt, which prevented the deployment of monetary policy. “This commitment has no limits,” she settled.
However, it was time to exhibit facts. The governors of Spain, Germany or Austria canceled their public acts and the Governing Council met at 11 in the morning to address the instability in which the markets are installed. In a brief statement at the end of the meeting, the institution notes that the pandemic has left “lasting vulnerabilities in the economy” that contribute to the “uneven transmission” of its monetary policy that prevent its process of “normalization” between jurisdictions and recommits to combat this fragmentation. The statement also launches at least a clearer sign that there will be a mechanism to combat future sovereign debt crises. The ECB announces that it has entrusted the technicians of the Eurobank to “accelerate the finalization of the design of a new anti-fragmentation instrument” that will later have to be examined by the council.
The ECB’s decision has been a respite for the sovereign debt markets: the
He knows in depth all the sides of the coin.