The European Central Bank invents a new tool to mitigate the defeat of bonds

The European Central Bank It announced Wednesday that it plans to create a new instrument to tackle the risks of a euro zone fragmentation, in a move aimed at allaying fears of a new debt crisis.

The decision comes after the central bank surprised market participants with an emergency meeting to address the high borrowing costs of many European governments.

“Since the gradual process of policy normalization began in December 2021, the Governing Council has pledged to act against renewed retail risks,” the European Central Bank said in a statement.

“The pandemic has left permanent weaknesses in the eurozone economy that are already contributing to the uneven transition of our monetary policy normalization across jurisdictions,” she added.

The comments reflect the recent rise in bond yields over the past week or so. After last week’s regular policy meeting, the European Central Bank proposed tighter policy tightening but failed to introduce any new measures to support the heavily indebted nations in the bloc.

This raised some tension among money managers over financial fragmentation and led to higher bond yields.

Italy 10-year bonds The yield crossed the 4% mark earlier this week – with one economist saying these levels “It can eventually turn into a problemof Southern Europe.

To address these concerns, the European Central Bank said on Wednesday it would reinvest recoveries from the Emergency Bond Purchase Program – referred to as PEPP – in a flexible manner and would ask its team to “accelerate the completion of the design of the new anti-fragmentation programme”. a tool.”

“Our commitment to The euro is our anti-fragmentation tool. This commitment has no limits. Our track record of intervening when needed supports this commitment.”

European countries faced materially high borrowing costs in the wake of the sovereign debt crisis, in 2011. Some of the imbalances have been addressed, but there are still concerns about the region as a whole, particularly because it has one monetary policy versus 19 different fiscal ones. positions.

return on Italian 10-year bonds It fell further after the European Central Bank announced it was trading below the 4% mark.

Borrowing costs for other eurozone governments also fell on the news, with Greece’s 10-year bond yield trading down more than 7%.

In the currency markets, the euro rose against the US dollar, continuing the trend seen earlier in the session when news broke of an emergency meeting.

Italian bank shares, which rose earlier on Wednesday, continued their rally after the monetary policy decision.

The decision “was not enough,” Jack Allen-Reynolds, chief European economist at Capital Economics, said in a note.

“The flexible reinvestment of the Energy Environmental Protection Program (PEPP) may buy policy makers a little time, but the new ‘anti-fragmentation tool’ the bank is working on will need more progress,” he said. “And there is no guarantee that they will reach a consensus on such an instrument at the next policy meeting in July, so we could see spreads widen further before a new instrument is in place.”

Mario Centeno, a member of the European Central Bank’s Governing Council, said a faster normalization of monetary policy is a risk that cannot be ruled out, according to Reuters. The central bank added that the pace of interest rate hikes would be “gradual”.