Inflation: Why are markets afraid of a resurgence of the eurozone debt crisis? –June 16, 2022 13:09


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

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

Financial markets have been quivering since the announcement of the European Central Bank.Financial Institutions Mentioned, Wednesday, June 15

Outlook for rate hikes

.. The idea is to counter inflation, especially if interest rates soar in certain eurozone countries, but in the face of surrounding panic, the ECB had to work to reassure investors.

How is the price status?

Announcement by the ECB on June 9th

Faster monetary tightening than expected

In the euro area to curb inflation, the bond market, where already issued debt is exchanged, is rocking. ECB asset purchases will cease on July 1, 2022, with key rate increases (0.25 percentage points) expected for the first time since 2011 in the same month.

Changes in interest rates at the European Central Bank (ECB) since 2008 (AFP /)

Changes in interest rates at the European Central Bank (ECB) since 2008 (AFP /)

As a result, interest rates in the most debt-rich countries are much higher than Germany’s benchmark interest rates (The Bund), which is a sign of investor distrust.

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

After receiving a message from the ECB last Thursday, experts expected a total increase of about 1.50 percentage points by the end of 2022.

Italy’s 10-year rate exceeded 4% on Monday. This is a level not seen in the eight years, which was still 0.50% in the summer of 2021.

Bund spread widens to 2.50 percentage points

.. In the current situation, the ECB can play accurately, “the rise in rates and spreads is normal, but there are some irrational aspects,” emphasizes Gilles Moëc, Chief Economist at Axa Investment Managers.

Is there any danger in my house?

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

Risk of distrust of Italian debt

And the threat of a recurrence of the debt crisis in the euro area since 2011/2012. During this crisis, German and Italian interest rates are about 5 percentage points apart, which is twice the current level. In 2021, this gap averaged 1.35 percentage points.

“Italy’s financial position is deteriorating much faster than elsewhere in the euro area,”

A country with slow growth

, A memo with AFP Franck Dixmier, Bond Management Director of Allianz Global Investors. Gilles Moëc adds, as fast as “questioning the Italian government’s plans three months ago.”

What is the signal sent by the ECB?

The ECB has decided to hold an exceptional meeting on Wednesday. The last time I met unexpectedly was in 2020, when I set up an emergency program for a pandemic. Wednesday,

The ECB wanted to show its determination to catch the bull in the horn

To avoid falling interest rates in the euro area and panicking Italy’s debt.

At the end of the meeting, the Frankfurt agency confirmed that a new “anti-fragmentation” device would be designed and instructed the team to “accelerate” its development.

She also promised to apply “a certain amount of flexibility to reinvestment”

Bonds held under an emergency program initiated during a pandemic (PEPP).

Specifically, “this means that while waiting for a particular tool, the ECB will probably use PEPP’s reinvestment by buying Italian debt,” Franck Dixmier elaborate.

About the rest of the content of this particular tool

According to Allianz GI experts, it’s a big issue so far, but the announcement is still welcome. In addition, bond rates have settled significantly following the ECB’s announcement.

“The ECB is completely free to implement monetary policy, and it is necessary and sufficient that there are no obstacles or obstacles to rate hikes,” explains Frank Dixmier. Also,”

ECB aims to fight inflation

According to Ilana Azuelos-Bossard, Deputy Director of Kiplink Finance, taking into account what is happening in the financial markets, especially borrowing rates, has greatly reassured the market. ”