Inflation: why do markets fear a return of the debt crisis in the euro zone? – 06/16/2022 at 13:09

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The European Central Bank in Frankfurt, June 15, 2022. (AFP/DANIEL ROLAND)

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The financial markets tremble after the announcements of the European Central Bank

. The aforementioned monetary institution, Wednesday, June 15,

the prospect of a rate hike

. The idea is to counteract inflation, particularly as interest rates rise in certain euro zone countries, but in the face of environmental panic, the ECB had to work to reassure investors.

What is the rate situation?

The June 9 announcement by the ECB of

a faster-than-expected tightening of monetary conditions

in the euro zone to curb inflation has violently shaken the bond market, where already issued debt is exchanged. ECB asset purchases will stop on July 1, 2022 and key rates are expected to rise (0.25 percentage point) in the same month, for the first time since 2011.

Evolution of interest rates of the European Central Bank (ECB) since 2008 (AFP / Getty Images)

Evolution of interest rates of the European Central Bank (ECB) since 2008 (AFP / Getty Images)

As a result, the interest rates of the most indebted countries rose much more than the German reference rate (the Bund), a sign of investor distrust.

This rate difference, called the “spread,” has widened dramatically

after the ECB’s message last Thursday that led experts to anticipate a total increase of around 1.50 percentage points, by the end of 2022.

The ten-year Italian rate exceeded 4% on Monday, a level not seen for 8 years, when it was still at 0.50% in the summer of 2021.

The spread with the Bund widened to 2.50 percentage points

. In the current context, “an increase in rates and spreads is normal but there is an irrational aspect” in which the ECB can precisely play, emphasizes Gilles Moëc, chief economist at Axa Investment Managers.

Is there danger in the house?

The current level of “spread” between Germany and Italy is resurfacing

a risk of distrust of Italian debt

and the threat of recurrence of a debt crisis in the euro zone after the one in 2011/2012. During this crisis, about 5 percentage points separated the German rate from the Italian rate, which is double the current level. In 2021, this gap averaged 1.35 percentage points.

“Financial conditions in Italy are deteriorating much faster than in the rest of the euro zone,”

slow growing country

, points out with AFP Franck Dixmier, director of bond management at Allianz Global Investors. So fast that he “challenged the plans of the Italian government three months ago,” adds Gilles Moëc.

What signals does the ECB send?

The ECB has decided to hold an exceptional meeting on Wednesday. The last time it met unscheduled was in 2020 to launch the emergency program against the pandemic. Wednesday,

the ECB wanted to show its determination to take the bull by the horns

and prevent interest rates from falling in the euro zone and panic over Italian debt.

At the end of this meeting, the Frankfurt institution confirmed that a new “anti-fragmentation” instrument would be designed and instructed its teams to “accelerate” its development.

He also promised to apply “some flexibility in reinvestment”

bonds held under its emergency program launched during the pandemic (PEPP).

Specifically, “this means that while it waits for the specific tool, the ECB will use the PEPP reinvestments, perhaps buying Italian debt”, explains Franck Dixmier.

For the rest of the content of this specific tool

, is the big blur at the moment, but its announcement is welcome, according to the Allianz GI expert. Also, bond rates have largely calmed down following the ECB announcements.

“It is a necessary and sufficient condition for the ECB to be totally free in conducting its monetary policy, that it not be harmed or hindered in its rate hikes,” explains Franck Dixmier. Also, he knows that ”

The ECB aims to fight inflation

but take into account what is happening in the financial market and in particular the interest rates on loans,” the market largely assured, according to Ilana Azuelos-Bossard, deputy director of Kiplink Finance.

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