ECB promises new crisis tool to help indebted southern states

  • Focus reinvestments on highly indebted members
  • Design a new tool
  • The disappointed markets
  • Lagarde will speak at 4:20 p.m. GMT

FRANKFURT/MILAN, June 15 (Reuters) – The European Central Bank pledged fresh support on Wednesday to temper a market rout that stoked fears of another debt crisis on the euro zone’s southern shore, but appears disappointed investors looking for bolder moves.

Government borrowing costs have soared on the periphery of the 19-nation currency bloc since the ECB unveiled plans last Thursday to raise interest rates to tame painfully high inflation that threatens to take root .

The sell-off was then exacerbated by the ECB’s vague pledge to limit rising borrowing costs, raising fears that policymakers could abandon the most indebted countries, such as Italy, Spain and Greece.

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Anxious to avoid a repeat of the debt crisis that nearly brought down the single currency a decade ago, the ECB backtracked just six days later, unveiling plans for a new support program and directing the maturing debt cash 1.7 trillion euro ($1.8 trillion) pandemic support program for indebted countries.

“The Governing Council has decided to mandate the relevant Eurosystem committees as well as ECB staff to expedite the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council,” said the ECB following an extraordinary meeting.

Speaking at a conference on Wednesday, Dutch central bank chief Klaas Knot said policymakers had instructed staff to work at an accelerated pace on the new tool, in case sending reinvestments south wouldn’t be enough.

“If that’s not enough, rest assured we’re ready,” Knot said.

His Slovak counterpart, Peter Kazimir, said it was still “premature” to discuss details of what a new tool would look like.

THE BARE MINIMUM?

Investors welcomed the ECB’s intentions but were still disappointed by the lack of details and the absence of a firm commitment.

“I think it’s basically the bare minimum of what one would expect, but I also think it’s the most realistic outcome of what they could compromise today,” said Piet Christiansen. , an economist at Danske Bank.

He added that asking staff to come up with a plan also gave decision makers some time to see how the market would settle on its own.

But the announcement also drew fire from those who argued the ECB was in danger of going too far.

“The job of the ECB is to guarantee price stability, not to ensure favorable financing conditions,” said Markus Ferber, a member of the European Parliament. “Some countries are now simply bearing the brunt of years of irresponsible fiscal policies.”

“If the ECB now launches another program to keep spreads low, it is getting dangerously close to (the) monetary financing of the state,” Ferber said.

The euro fell about 0.5% against the dollar after the ECB statement, but Italian yields eased about 2 basis points after a brief rally.

The spread between Italian and German 10-year bonds, a key indicator, meanwhile widened to 241 basis points immediately after the announcement, but then fell back to 226 basis points, indicating confidence that the ECB will act more decisively, perhaps at the July 21 policy meeting, when it is almost certain to raise rates for the first time in more than a decade.

The ECB’s move comes on the same day the US Federal Reserve is expected to raise interest rates, with investors dramatically upping their bets for a 75 basis point hike, a shift in expectations that fueled a sharp sell-off in markets global. Read more

Italian spreads peaked at around 250 basis points on Tuesday, their highest since early 2014 raising fears that Italy’s high debt levels could become unsustainable.

There is no universally accepted level for this spread, but Carlo Messina, the CEO of Intesa, Italy’s largest bank, said earlier on Wednesday that the country’s economic fundamentals would justify 100 to 150 basis points. .

The spread on Spanish 10-year bonds meanwhile widened to 128 basis points after the ECB announcement of around 125, while for Greece it widened to 269 basis points from around 260.

ECB President Christine Lagarde is due to speak at 4.20pm GMT in London at an earlier scheduled engagement.

($1 = 0.9542 euros)

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Reporting by Balazs Koranyi, Francesco Canepa and Frank Siebelt; Editing by Jacqueline Wong, Sam Holmes, Carmel Crimmins and Tomasz Janowski

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