Financial markets have been grumbling for months. The bond market in particular is experiencing severe turbulence. To this end, the European Central Bank (ECB) convened a special meeting on Wednesday morning, where the currency supervisor discussed “current market conditions”. It is a question of averting a new euro crisis.
Specifically, it is an increase in risk premiums, so-called “spreads”, for the most indebted euro countries such as Italy, Greece or Spain. This gap between less risky government bonds and riskier government bonds has increased significantly since the ECB’s announcement of the interest rate hike and is now at its highest level in the last two years. At the same time, government bond prices fell due to a sharp sell-off. The ECB announcement now has a mirror effect.
These uncertainties are also weighing on the cryptocurrency market. The rise in key interest rates and the end of the ECB’s bond purchase program could reduce the willingness to invest in risky assets such as Bitcoin, technology stocks, but also risky government bonds.
The ECB is in a dilemma
Experts now fear that with monetary policy tightening, support for the respective countries could decrease and a new debt crisis could result. The ECB previously announced that it would stop buying government bonds starting in July.
However, the ECB is in a dilemma. With inflation high, the central bank is unable to sustain the markets with aggressive easing. In theory, it could use additional leverage to reduce the willingness to invest in matching government bonds. During the last euro crisis twelve years ago, the ECB combined investment in government bonds on high terms with the OMT program. As a result, speculative investment in individual euro countries declined. On the other hand, the central bank does not want to feed panic on the market itself.
It is not yet clear whether and, above all, what monetary measures the ECB will adopt to keep the problem under control. It also remains uncertain whether a corresponding notification about possible measures will be published. ECB director Isabel Schnabel has at least hinted at a first antidote. For example, under the “PEPP” multi-billion dollar bond purchase program, flexible reinvestment of funds from past due bonds could narrow yield gaps.
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