The ECB first calms the markets

AndIt is a somewhat clumsy word that is now used conspicuously and often in speeches and documents of the European Central Bank (ECB): it is called “fragmentation”. Translated, it means something like a messy split. What is meant by central bank is the concern that with the next hikes in interest rates, the first in eleven years, the euro area could split financially into parts if the yields on government bonds of highly indebted countries, in southern Europe in particular, should they increase rapidly and with it widen the gaps up to the yield of German government bonds. There has recently been a rampant fear that something like the euro crisis might start over. After all, yields on Italian government bonds, for example, had already risen to over 4 percent since the ECB unveiled its plans to hike interest rates in more concrete terms last week.

New monetary policy tool of the ECB

The ECB’s response to this also bears the more cumbersome name of “anti-fragmentation tool”. It is a monetary policy tool with which the central bank is able to prevent bond yields and therefore the interest rates of individual euro countries for their national debt from getting out of control, even in times of rate hikes. of interest. The details are not yet publicly known, but in principle such a tool can only work if the central bank buys bonds from the countries concerned. ECB President Christine Lagarde presented the relevant plans to euro area finance ministers on Thursday, saying the new tool will be used if the cost of borrowing for weaker countries increases too or too quickly. On Wednesday, the Governing Council of the ECB agreed at an emergency meeting that corresponding plans for a new instrument should be pursued with greater urgency. Until then, the ECB wants to flexibly invest the maturing bond money of its maturing bond purchase program, likely in favor of indebted countries in the event of turbulence.

A certain calm has been recorded in the European government bond market. Yields in southern European countries fell sharply on Wednesday. In the bond markets it was said that no matter what this new ECB instrument looks like, what matters is the signal that the ECB will not accept every increase in bond yields. Yields rose again sometime on Thursday, albeit not to the old level. On Friday, however, there was some relaxation.

“The markets now know that the ECB will intervene before a crisis has completely gotten out of hand,” said Holger Schmieding, chief economist at Bankhaus Berenberg. Financial markets were hoping for the announcement of an anti-fragmentation tool and have now recognized it with lower short-term bond yields, said Michael Heise of fund company HQ Trust: “But the announcement will only have a temporary and fleeting effect on come back.”

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