The financial markets have been rumbling for months. The bond market in particular is experiencing severe turbulence. To this end, the European Central Bank (ECB) called a special meeting on Wednesday morning, in which the currency watchdog discussed “the current market conditions”. It is about nothing less than averting a new euro crisis.
Specifically, it is about increased risk premiums, so-called “spreads”, for more indebted euro countries such as Italy, Greece or Spain. This difference between less risky government bonds and riskier government bonds has increased significantly since the announcement of the ECB’s interest rate hike and is now at its highest level in two years. At the same time, government bond prices fell due to a sharp sell-off. The announcement by the ECB now has a mirror-inverted effect.
These uncertainties are also weighing on the crypto market. The increase in key interest rates and the end of the bond purchase program by the ECB could reduce the willingness to invest in risky assets such as Bitcoin, tech stocks, but also risky government bonds.
ECB is in a dilemma
Experts now fear that with the tightening of monetary policy, support for the respective countries could fall and a new debt crisis could be provoked. The ECB had previously announced that it would stop purchasing government bonds from July.
However, the ECB is in a dilemma. With inflation high, the central bank is unable to support markets with aggressive easing. Theoretically, it could use additional leverage to reduce the willingness to invest in corresponding government bonds. During the last euro crisis twelve years ago, the ECB combined investments in government bonds with high conditions with the OMT program. As a result, speculative investments in individual euro countries declined. On the other hand, the central bank does not want to fuel the panic on the market itself.
It is still unclear whether and, above all, which monetary measures the ECB will take to get the problem under control. It also remains uncertain whether a corresponding notification on possible measures will be published. ECB Director Isabel Schnabel at least hinted at a first antidote. For example, as part of the multi-billion dollar bond purchase program “PEPP”, the flexible reinvestment of funds from expired bonds could mitigate the yield gaps.
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