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Mario Draghi and Christine Lagarde (archive image): Who is helping whom here?
Photo: ALBERTO PIZZOLI / AFP
When Christine Lagarde calls the Governing Council of the European Central Bank (ECB) together for an extraordinary meeting, the situation is at least precarious.
The 25-strong decision-making body normally only meets twice a month.
Decisions are made at most every six weeks when the level of key interest rates or bond purchase programs is being discussed.
The fact that the monetary watchdogs got together in a hurry this Wednesday shows that danger is imminent.
The turnaround in interest rates, which the ECB was forced to initiate because of high inflation, threatens to have such severe side effects that President Lagarde and her group apparently even see the existence of the euro zone in danger.
Similar to the former head of the ECB, Mario Draghi, who signaled in a legendary speech almost exactly ten years ago – at the height of the euro crisis – that he would use all available means to protect the monetary union (“
whatever it takes
”) Lagarde will probably make it clear to investors on the financial markets that she will not let any euro country go bankrupt or slide out of the euro.
To this end, it intends to use government bond purchases more flexibly in the future.
In addition, a new tool is to be developed to prevent interest rates on government bonds from skyrocketing in individual countries.
The reason for the urgent operation is the unrest on the financial markets, which the ECB helped to trigger.
Last week, the central bank not only announced that it would raise key interest rates in July for the first time in eleven years, but also that it no longer intended to buy any more government bonds on the market.
Only the money from expiring bonds is to be invested in new debt securities for the time being.
With this step, the ECB actually wanted to herald the end of an era that had begun with the euro crisis and had given the central bank a new role: it no longer only had to ensure price stability, but also to protect the construct of the euro as a whole.
For years it has therefore held promissory notes from the euro states worth trillions in its bloated balance sheet, which is actually supposed to shrink again at some point.
Spreads shoot up
But getting out is obviously not that easy.
Because with the end of the additional bond purchases and the planned increase in key interest rates, it will become more expensive again for the states of the euro zone to borrow money on the financial markets.
And that's troubling some countries.
The effect is particularly strong in the case of Italy.
The heavily indebted country was already the focus of the euro crisis.
At that time, the government sometimes had to offer investors more than seven percent interest so that they could finance the country's national debt.
In the meantime, the value had fallen drastically – at the beginning of 2021, for example, the yield on Italian government bonds was only around 0.5 percent.
However, since the beginning of this year at the latest, when it became increasingly clear that inflation is rising and the era of ultra-loose monetary policy must come to an end, yields have shot up again.
At the beginning of May, yields of more than three percent were due on Italian government bonds, and on Monday this week it was even more than four percent – more than in more than eight years.
The problem becomes particularly clear when you look at the so-called spread – the difference between the yields on Italian government bonds and German debt securities.
Investors consider the latter to be particularly safe.
While this spread was 1.2 percentage points at the beginning of the year, it had doubled to 2.4 percentage points by Tuesday.
The risk premium has also risen for bonds from Spain and Greece – but by no means as drastically as for bonds from Italy.
Investors currently have the least confidence in the third-largest economy in the euro zone, which is mainly due to the immense national debt, which now accounts for around 150 percent of the country's annual economic output.
For comparison: In Germany it is 69 percent.
Ironically, Draghi
It is a subtle irony of history that Mario Draghi, of all people, who saved the eurozone with his historic
whatever-it-takes
speech in the summer of 2012, now, as Italian Prime Minister, has to look on as his country might find itself at the center of a euro crisis a second time equipment.
The situation is still a long way from being as dramatic as it was ten years ago – but the ECB has only just begun its interest rate turnaround.
If it is serious about fighting inflation, it will have to raise key interest rates significantly more than it last announced for July and autumn.
In order to prevent the spreads of financially weaker countries like Italy from skyrocketing, the central bank wants to reinvest the money from maturing bonds "more flexibly" - it should therefore be invested primarily in paper from countries that are considered to be particularly vulnerable.
In addition, the monetary watchdogs are making it clear that they can launch a new bond purchase program at any time.
"We will not tolerate any changes in financing conditions that go beyond the fundamental factors and endanger the transfer of monetary policy," the German ECB Director Isabel Schnabel announced on Tuesday in the most beautiful language of a central banker in a speech in Paris, and at the same time made it clear that that the commitment to the euro »knows no limits«.
Draghi says hello.
It remains to be seen whether the new announcements will be sufficient to calm the situation permanently.
On Wednesday, however, the spreads went back at least for the time being.
Breathe for Italy - and also for the ECB.