ECB’s crisis weapon pledge is vague and late

June 15, 2022

6:21 PM GMT+2

Last Updated 3 hours ago

 

ECB’s crisis weapon pledge is vague and late

By Pierre Briancon

https://www.reuters.com/breakingviews/ecbs-crisis-weapon-pledge-is-vague-late-2022-06-15/?utm_campaign=trueAnthem%3A%20Trending%20Content&utm_medium=trueAnthem&utm_source=facebook&fbclid=IwAR1ySHMAeHe9yTLW8OQ7EJUyTvVuKnHEqtizCan-zdBSdkVBcLU7Mdsi5HU

 

LONDON, June 15 (Reuters Breakingviews) - The European Central Bank has seen the light. The ECB is acknowledging at last that it must address ever higher borrowing costs for some euro zone economies. Its governing council says it will “accelerate” the design of a new monetary policy tool to tackle soaring yields of weaker states. The pledge comes late, and the intention remains vague. It’s an invitation to investors to test the central bank’s resolve.

 

Less than a week ago, the ECB’s ruling body didn’t see the need for any specific step to fight diverging financial conditions between member states. The premium investors demand to hold debt issued by countries like Italy and Spain had already started to rise as all major central banks have pushed up interest rates, and the ECB itself ended its own quantitative easing programme. The Italian spread over German debt widened by 37 basis points after last week’s meeting, when President Christine Lagarde simply indicated that her institution would be ready to act, without more precisions.

 

 

The ECB’s belated reaction now raises two questions. The first is how fast the “acceleration” of the new instrument’s design can be. The bank seems to imply that work was already under way to devise an asset-buying programme, which would allow it to focus its purchases on countries whose bond yields don’t reflect economic fundamentals. But the ECB has had months to prepare for an exit from so-called quantitative easing.

 

The second question is how credible such a programme will be, considering the persistent divisions within the governing council on a bond-buying programme targeted towards individual states. The announcement today implies that a majority has finally accepted the need for a programme to ensure that countries with reasonable economic policies are not unduly punished by markets.

 

But divisions remain on the level of yields that would warrant ECB intervention, and whether such action would be conditional on specific policy pledges from individual governments. That was the case of the ECB’s previous tool for helping individual countries, Mario Draghi’s so called Outright Monetary Transactions, which has remained unused. The hawks on the council will also fear the ECB could be accused of funding governments, or monetary financing.

 

The ECB needed to at least confirm the existence of its plans for a new tool in order to calm investors. But the “acceleration” will need to be speedy, and purchases forceful, for bond investors to take lasting comfort.

 

Follow @pierrebri on Twitter

 

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

 

CONTEXT NEWS

 

The European Central Bank on June 15 said that it would “accelerate the completion of the design” of a new monetary policy tool designed to address so-called fragmentation, or the widening of bond yields between different euro zone countries.

 

The news came after an emergency meeting of the ECB’s 25-strong governing council on June 15, after yields on the sovereign bonds of countries like Italy and Spain rose to eight-year highs in previous days.

 

The governing council also said it would “apply flexibility in reinvesting redemptions” coming due on the portfolio of securities acquired under its pandemic-focused asset-buying programme.