European Central Bank board member Isabel Schnabel sent a strong signal on Tuesday that the ECB is ready to create a new bond-buying tool at short notice to contain a surge in southern European bond yields, which is rekindling memories of the bloc's debt crisis a decade ago.
Investors dumped southern European government debt in recent days after the ECB laid out plans on Thursday to phase out its giant bond-buying program and conduct a series of interest-rate hikes to fight record-high inflation. The yield on Italy’s 10-year government bonds has climbed to about 4.2%, the highest level since 2013 and up almost three-quarters of a percentage point in just five days.
Ms. Schnabel, a German economist, said the ECB “can and should respond to a disorderly repricing of risk premia” in parts of the currency union. While Ms. Schnabel didn’t give any details of a possible new ECB bond-buying tool, she assured investors that it could be “put into practice within a very short period of time.”
Investors were disappointed last week that the ECB provided no concrete details of how it will support southern European governments as interest rates rise.
“Our commitment to the euro is our anti-fragmentation tool. This commitment has no limits,” Ms. Schnabel said at a speech in Paris. “And our track record of stepping in when needed backs up this commitment."
Ms. Schnabel’s words echo a famous speech by former ECB President Mario Draghi, an Italian, whose remark in 2012 that the ECB would do “whatever it takes to preserve the euro” helped to end the region's debt crisis. His speech was followed, weeks later, by the creation of a potentially unlimited ECB bond-buying tool, known as Outright Monetary Transactions, which was never used.
Any new tool “might again look different, with different conditions, duration and safeguards to remain firmly within our mandate,” Ms. Schnabel said.
“My guess is that a new ECB backstop is coming,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management in Geneva.
“I don't know if this will be enough,” Mr. Ducrozet said. “But there should be no doubt that there will be a bold response eventually.”
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