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The ECB backs off on fears of a new debt crisis

Bild: license moritz320 / Pixabay

The central bank initially announced a stop on bond purchases, but decides to buy bonds again during the crisis meeting due to the rise in government bond interest rates; The FED applies emergency braking

Only recently, after too much hesitation, did the European Central Bank (ECB) announce a slight move away from the zero and negative interest rate policy and excess money that have determined the ECB’s monetary policy for 14 years. In view of the official record inflation rate of 8.1 per cent, the ECB wanted to initiate an attempt to reverse the trend in monetary policy.

The central bank in Frankfurt had announced that it would stop buying bonds on 1 July. At the next ECB monetary policy meeting on 21 July, it is also “intent” to raise the benchmark interest rate by 25 basis points to 0.25 percent. It would be the first rate hike in more than a decade. Whether it actually arrives depends Telepolis doubts have long been raised.

It was clear that bond purchases were not to be stopped even in real terms. Because maturing bonds should be reinvested at least until 2024. So more securities should be bought.

However, since central bank announcements have caused a significant new rise in interest rates on government bonds of indebted countries like Italy, the ECB has long since backtracked on this issue out of fear of a new crisis. debt flared up, as was clear in light of a hastily convened emergency meeting on Wednesday. More on that below.

“Is a new debt crisis looming?”

“Is a new debt crisis looming?” It was, for example ZDF to hear again. The fact is that the national debts of large euro countries such as Italy, Spain and France have continued to grow due to the Crown crisis. The debt has not been reduced, as predicted with the flood of money, with which the ECB should have bought time, but which has passed unused.

More recently, the debt-to-GDP ratio to economic output (GDP) has even declined slightly. But this has mainly to do with the strong recovery growth in 2021, but also with the very high inflation of now 8.1 per cent in the euro area, with which part of the national debt is inflated.

However, as the Frankfurt Central Bank continues to rehearse the tale that inflation has skyrocketed due to the war in Ukraine, it should be remembered once again that inflation in the euro area and in Germany has soared. at 5% last December it had already risen to 5.7%. .

Italy’s debt ratio is now nearly 151 percent. In Spain it is already a good 118 per cent and in France the rate is almost 113 per cent. This means that three large euro countries have huge debts and things could get serious for them sooner or later. This is especially true for Italy as a problem child, which for years has been an increasingly noisy time bomb.

The ECB’s Italian Mario Draghi initiated the flow of money, which was not reversed under France’s Christine Lagarde, but was also extremely expanded during the Crown crisis, mainly to protect the third euro area and thus also the euro from the accident.

Meanwhile, Draghi is no longer President of the ECB but Prime Minister of Italy and will benefit from the new ECB sausages now fried by Lagarde for Italy.

To compare these debt ratios, the euro area average is almost 96 per cent. In Germany, the rate is a whopping 69 percent, which means that the country is still well above the Maastricht stability criterion of up to 60 percent. Greece, whose debt ratio was to be reduced to 120 per cent by 2020 under the auspices of the International Monetary Fund (IMF) and with Lagarde at the helm, actually has more than 193 per cent and was even on the verge of surpassing the the 200 percent threshold in the meantime.

The prime rates

Since it has long been clear that the ECB will eventually have to raise interest rates due to high and rising inflation, ten-year Italian government bond yields have fallen from 0.56 percent to around 4.1 percent. from the percentage increase last August.

The increase has been strong recently, as the yield at the end of March was only about half of what it had been before. As bond interest rates in some southern euro countries have recently risen significantly, memories of the euro debt crisis of the past decade inevitably resurface.

It is clear that high and rising interest rates on government bonds, Italy’s current level at which they were eight years ago, will soon put countries like Italy into trouble. When, in the midst of the debt crisis eleven years ago, Italian bond yields rose to 4.8 per cent, there was talk of the “collapse” of the third euro area.

At that time, it was Draghi who said by the executive president of the central bank: “everything necessary” would be done. So Draghi wanted to do everything to save Italy and the euro. So he wanted to keep the presses running indefinitely to buy government bonds and reduce risk premiums. By then, at the latest, the limit on the ban on state funding through the central bank had been exceeded.

It may even have been necessary at the time. An orderly exit from this long-term inflationary monetary policy would have been just as necessary over the years. The purchased time should also have been used, but this did not happen. But the exit from the deluge of money never came, as the central bank of central banks had repeatedly asked.

The ECB, on the other hand, has been conducting economic policy for years instead of guaranteeing monetary stability, which is its real task. With the slightest economic downturn, bond purchases were expanded again with the transfer of the executive presidency from Draghi to Lagarde.

This is why the ECB, as was to be expected and has been criticized several times here, has maneuvered itself into a dilemma that is now becoming visible to all. Any tightening of monetary policy will cause shockwaves and it has been clear for some time that the longer problems are put off in Frankfurt, the harder the landing, the harder the consequences.

Meanwhile, the debt situation has also worsened. When Draghi’s historic sentence fell, the Italian state’s debt was still two thousand billion euros. But now the national debt has already grown to 2.7 trillion. This means that even with slightly lower yields than then, Italy will soon face huge problems. Because debt service will soon consume larger and larger portions of income.

The Bonds

So there is still time, as many bonds that have been bought cheaply in recent years have longer maturities. But time is running out and it is clear that a dangerous downward spiral is imminent for some countries, especially since the risk of recession is also increasing in Italy.

Germany currently has to offer a yield of around 1.7 percent on 10-year bonds, but the interest rate (spread) difference to Greece is already three percentage points. So Greece has to pay a risk premium of a whopping three percentage points, which is why the country now receives only nearly 4.8% of new bonds. Given the extremely high level of debt, this will also become critical in the medium term.

In the case of Italy, there is also the fact that Italian banks have saturated themselves with Italian bonds with ECB money, hitherto extremely cheap. According to the Italian Banking Association, Italian financial institutions hold Italian government bonds worth 422 billion euros. The country’s banks will soon find themselves in trouble again. In the wake of rising interest rates, these bonds are losing value.

This weighs on banks’ balance sheets. There is a risk of a worsening of the banking crisis, which in any case has never ended in Italy, as the events of three years ago demonstrated.

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