What has the ECB decided on the bond crisis? Nothing

By Marcus Ashworth

“It’s nothing, but it’s nothing.” The philosopher Ludwig Wittgenstein wrote about the inability to discuss private senses such as pain. It could, however, hypothetically describe the European Central Bank’s announcement on Wednesday in the same way, following an emergency meeting of policymakers that took more than three hours to produce less than 150 words.

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European bond traders interpreted the surprise meeting of the ECB’s Governing Council on Wednesday as a prelude to urgent action to restore calm in a market whose turmoil had pushed Italy’s 10-year government bond yields above 4% for the first time in 2014, with borrowing costs for HellasSpain and Portugal to increase as well.

Yields fell amid hopes of a more substantial plan to defend the weakest members of the eurozone in the face of President Christine Lagarde’s vague references to flexible reinvestment of central bank bonds in the central bank. .

Instead, the markets received a “contentless hamburger” in return for a surprising failure of the ECB to manage expectations and communication management.

The rest of the week was followed not only by a significant increase in interest rates by the US Federal Reserve, but also the fifth consecutive increase by that of the United Kingdom (Bank of England), while measures are likely to be expected from the side of the Central Bank of Japan. The contrast with the negative deposit rate of 0.5% in the euro area is becoming more and more emphatic.

Dialect

European bonds have received some “consolation” from the commitment to “speed up the completion of the design of a new anti-fragmentation instrument”, a phrase which in the ECB’s dialect means limiting spread yields between German and foreign government bonds. of regional countries such as Italy and Hellas.

Why this commitment was not included in last week’s regularly scheduled policy statement remains a mystery most likely explained by the controversy between “hawks” and “pigeons” in the field of monetary policy.

The usual way the ECB operates involves revealing through sources at a later time what was actually discussed and what was planned. If the eurozone really wants to do “what it needs to do”, it will require a major “sweep” of Italian bonds, especially with their huge issue schedule.

THE Hellas is already well-financed for the coming years and can afford the market collapse storm that saw its 10-year borrowing costs rise to 4.25% from 1.5% at the beginning of the year.

The big patient

The Italian Ministry of Finance, however, has already delayed its planned schedule for issuing new debt this year. Another factor is government credit ratings, with S&P Global Ratings putting Italy’s BBB rating on a positive outlook last year.

This was largely based on how cheap it was to fund the country at the time, which was actually paid instead of paying to raise money on short-term issues. The era of negative interest rates is long gone – and with it will surely soon pass Italy’s positive credit outlook.

Policymakers will have to put a lot more “flesh” in the framework of their decisions on Wednesday, if they are serious about their intention to stop the spill of bond spreads.

Italian yields traded at 30 basis points on Wednesday and are still four times higher than where they started the year. The risk of market disintegration if investors do not appear to be satisfied with the solution that the ECB will eventually reach is high and increasing.