The European Central Bank intervenes to keep the rising interest rates on government debt of Italy and other vulnerable euro countries in check. This can be made up from a statement which the ECB board released on Wednesday after an scheduled emergency meeting.
The ECB is preparing to buy up government bonds of weak euro countries in a targeted manner. With this, the central bank wants to lower the interest rates on the government bonds of these countries. Interest rates on the financial markets have risen since the regular ECB meeting last Thursday. At the time, the ECB announced broadly raising interest rates to deal with the spike in inflation. Now she has to partially correct this decision again.
The interest rates on government debt of vulnerable countries are rising faster than those of, say, Germany and the Netherlands. The interest rate differential between Germany and Italy, the so-called spread, was below 2 percentage points before last Thursday, and then rose to 2.5 percentage points on Tuesday afternoon. On Wednesday, when it was announced that the ECB would hold emergency talks, the interest rate spread fell again to 2.2 percentage points.
Widening spreads were a key stress indicator during the euro crisis (2011-2012), when investors questioned the euro’s survival. At the peak of the euro crisis, the spreads were more than 5 percent.
Fragmentation
Although a euro crisis is not imminent this time, the ECB is still concerned: if the differences in market interest rates are too great, it will be increasingly difficult to conduct a single monetary policy effectively across the eurozone.
In the words of the ECB Governing Council, ‘fragmentation’ in the euro area must be avoided. In concrete terms, the ECB wants to replace government bonds of euro countries, which it bought during the corona pandemic and which are expiring, with Italian or other southern European loans. For example, the interest on those loans must be specifically depressed.
Preparations are also being made for a new buying program, purely aimed at countries whose spreads are widening too much. The ECB speaks of a ‘new anti-fragmentation tool’. Incidentally, the ECB leaves open what levels of interest rate differentials it considers acceptable.
Also listen to this podcast: The European Central Bank wants to raise interest rates: what does this mean?