Because the markets are afraid of a repeat of a debt crisis in the eurozone

The prospect of rising European Central Bank inflation rates has sparked markets and spurred bond yields in some eurozone countries, to the point where the European financial institution has been forced to intervene to reassure investors.

What is the state of interest rates?

The ECB’s announcement on 9 June that it announced a faster-than-expected easing of monetary policy to tackle inflation caused strong shocks in the bond market.

Bond purchases by the ECB will end on July 1, 2022, while for the same month an increase in key interest rates of 0.25% is forecast, for the first time since 2011.

As a result, the interest rates of the most indebted countries increased more than the interest rate of the German bonds (Bund), which is also the reference point, as a sign of the negative attitude of the investors.

The spread increased dramatically after the ECB announced last Thursday, which led analysts to forecast an overall increase of 1.50 points by the end of 2022.

The interest rate on Italian 10-year bonds exceeded 4% on Monday, a level unprecedented for 8 years, while in the summer of 2021 it was at 0.50%. The difference with the Bund increased to 2.50 percentage points.

At the moment, “an increase in interest rates and spreads is normal, but there is an absurd dimension,” on which the ECB can play, says Gilles Moëc, chief economist at Axa Investment Managers.

Is there an underlying danger?

The current level of spread between Germany and Italy rekindles the risks related to the Italian debt and the threat of a recovery of a debt crisis in the eurozone after the crisis 2011/2012.

During that crisis, about 5 percentage points separated the German from the Italian interest rates, which is twice the distance from today. In 2021, this distance was on average at 1.35 percentage points.

“Financial conditions in Italy are deteriorating much faster than elsewhere in the eurozone,” said Franck Dixmier, director of bond management at Allianz Global Investors.

So fast that it “calls into question the Italian government’s three-month plans,” adds Gilles Moëc.

What are the signals emitted by the ECB?

THE The European Central Bank decided to hold an extraordinary meeting yesterday. The last time it held an emergency meeting was in 2020 to launch the emergency anti-pandemic program.

Yesterday, the ECB wanted to show that it is determined to “catch the bull by the horns”, preventing interest rate shifts in the eurozone and creating panic over Italian debt.

At the end of the meeting, the ECB confirmed that a new tool “against the fragmentation” of the bond market would be designed and instructed its services to “speed up” the relevant procedures.

It also pledged to implement “relative flexibility in reinvestment” in bonds held under the emergency plan implemented during the pandemic.

This in particular means that “pending the specific tool, the ECB will use PEPP (Pandemic emergency purchase program) reinvestments, perhaps buying Italian bonds,” explains Franck Dixmier.

Regarding the rest of the content of this special tool, there is currently uncertainty, but the announcement of its creation was positively received, according to analyst Allianz GI.

After all, the situation in bond interest rates eased to a large extent after the ECB announcements.

“The absolute freedom of the ECB to conduct its monetary policy is a necessary and sufficient condition, so that it does not hinder or slow down the rise in interest rates,” explains Franck Dixmier.

Moreover, the fact that it became known that “the ECB aims to tackle inflation, but takes into account what is happening in the market and especially in lending rates” greatly reassured the market, according to Ilana Azuelos-Bossard, Deputy Director of Kiplink Finance.

Source: ΑΠΕ-ΜΠΕ