Germany cuts off from ECB on bond market risks

Germany’s Finance Minister has challenged the European Central Bank over the specter of bond market fragmentation in the eurozone, saying he does not see particular dangers in current market conditions. .

Christian Lindner told the ECB’s president in a closed-door session that he was not worried by recent moves in bond yield differentials in the euro area and that talking about fragmentation in the eurozone’s financial markets Blocks can damage trust, according to people familiar with the discussion.

His words came after the ECB held emergency meeting on Wednesday, in which its board pledged to accelerate plans to create a “new defragmentation engine” – a reference to the growing gap in borrowing costs between countries with more stable sovereigns like Germany and more vulnerable member states like Italy.

The ECB’s extraordinary meeting comes after bond yields in countries like Italy and Spain spiked to eight-year highs after decision of the ECB valuation department Last Thursday to stop buying more bonds and start raising interest rates.

Euro zone finance ministers discussed the situation with Christine Lagarde, president of the ECB, during a meeting in Luxembourg on Thursday. Not all politicians believe the recent movements are inappropriate, and Lindner thinks a hastily convened ECB meeting risks stoking markets.

Speaking before the meeting, Lindner said the euro area was “stable and strong” and he did not share concerns about fragmentation in the region. While the disparity is growing among some member states, their current levels suggest “no need to worry”.

“Our duty as finance minister is to show that we are getting back to sustainable public finance and leaving behind the expansionary fiscal policy of the pandemic,” he said. importance of addressing inflation. The German finance ministry did not respond to a request for comment.

Sigrid Kaag, the Dutch finance minister, said after the meeting in Luxembourg that it was important to “build confidence and calm” and not “reveal yourself too soon” when watching what was going on. out on the market.

Lagarde defended the ECB’s handling of the situation during the meeting, telling ministers, “we must address the risk of fragmentation so that monetary policy can be implemented across the eurozone”, according to people familiar with the matter. familiar with the discussion.

“The risk of fragmentation is a serious threat to our mission of price stability,” she added. Doubting our commitment would be a grave mistake.”

Paschal Donohoe, president of the eurogroup, later said the recent movements in financial markets were a reaction to the ECB’s “understandable” decision to begin normalizing monetary policy.

He added that the ministers were in “absolute agreement” with their view that the eurozone would continue to be “very strong, continue to be resilient, even if those market conditions change in the right way.” of them”.

Lagarde talks hard about inflation last week by revealing plans to end eight years of negative interest rates and buy bonds. But days later, the ECB called an emergency meeting and said it would speed up the implementation of a new policy tool to tackle the turmoil in the bond market.

The central bank has given few details on how the new tool might work, although most experts expect it to involve targeted bond purchases by eurozone countries. Unreasonable borrowing costs compared to other countries. Analysts expect the ECB to announce the tool at its meeting on July 21.

Italy’s central bank governor Ignazio Visco on Thursday said their emergency meeting showed no signs of panic. But he also said that any increase in Italy’s spread above 2 percentage points creates “very serious problems” for the even transmission of monetary policy.

ECB fears that panic in the bond market could push up borrowing costs of weaker countries to the point that it could drag them into a financial crisis and prevent the central bank from bringing inflation down from a record 8.1% to its 2% target.

One explanation for what the ECB is trying to achieve comes from board member Isabel Schnabel, who said in a speech shortly before Wednesday’s meeting that “there is no reason to assume that the government bond yields are the same”.

“There are times, however, when yields rapidly deviate from economic fundamentals, causing financial instability and thus fragmentation,” defines Schnabel as “the disruption of the economy.” in the relationship between sovereign yields and fundamentals, giving rise to nonlinear and destabilizing dynamics”.

Ministers attending the euro group meeting in Luxembourg separately agreed that they should work to strengthen the region’s common framework for handling banking crises and national deposit guarantee schemes.

However, they did not endorse a detailed work plan to complete the EU banking union project, as had been encouraged. Instead, they agreed to review the project, to identify “additional measures” to address salient elements of the plan.

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