By Tasos Dasopoulos
In an environment of increased uncertainty, not so much for high inflation, which is a global phenomenon, but mainly for the energy sufficiency of the Eurozone, the ECB is expected to proceed within the week, with the first increase in the interest rates of the euro.
South’s bond spread protection tool rumored to be called the “Transmission Protection Mechanism” is still in a cloud of “deliberate” ambiguity, both about its features and the conditions for its activation. If everyone knows that it exists, but no one knows when and how it is activated, they will not be tempted to try it.The truth is that since the announcement of the mechanism on June 15, yields on both Greek and Italian bonds have fallen significantly.
The Greek 10-year was trading on Friday with a yield of 3.53% from 4.36% a month earlier. The yield on the corresponding Italian, despite the political crisis of the neighboring country, reached 3.36% on the same day from 4.05% a month earlier. Therefore the announcement of the mechanism alone achieved the preliminary objective.
At the same time, the fact that the head of the Federal Central Bank of Germany, Mr. Joachim Nigel, has declared his opposition to the existence and operation of this mechanism has not been hidden. This, if the countries that will be favored do not undertake serious fiscal commitments. This fact, as well as similar disagreements of other central bankers from the European North on the ECB Board, gives another interpretation of the delay in announcing the new mechanism. The one that wants there to be no agreement yet on its framework and operating conditions, with the result that it will not be announced even on Thursday.
But after the interest rate hike by 25 basis points, the scene will change. Markets will find themselves in a new phase with tangible events and will have to adjust their strategy. How exactly they will do it will depend on developments that go beyond the global race to raise interest rates in the US, Great Britain, Switzerland and Japan and the inflation rally.
The turning point of the energy crisis
In addition to the risk of high inflation, the Eurozone also faces the risk of running out of natural gas from Russia. The markets know that this would constitute an “energy shock” not only for households, but also for the industry of the Old Continent. They also know that such a shock will be difficult to overcome. At least immediately.
The first stop date for this development will be July 20, the day before the ECB announcement on interest rates. The North Stream 1 pipeline that sends Russian natural gas to Northern Europe via Germany is expected to reopen on Wednesday. If this is not done, the day before the announcement of the interest rate increase, nervousness will reach its peak.
The September increase
In the next phase, if Russian gas does not restore its flow to Europe, inflation is likely to start to rise. This fact will put the ECB in a dilemma when it comes to its second move on the interest rate front. Will the second rate hike be 0.50% or more if the first hike has effectively failed to contain rising prices? As can be seen, everything will depend on the developments in the interim period of the two increases, the reaction of the markets and the course of the energy crisis.
Source: Capital
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