Frankfurt’s new bazooka is an economic tool that raises the umbrella of protection for the most vulnerable economies.
By Chrysostomos Tsoufis
June 15th may go down in history as the date that Christine Lagarde she had to say her own whatever it takes, walking in the footsteps of its predecessor Mario Draghi. Markets tried to challenge its resolve to prevent the sovereign debt market from fragmenting, sending bond yields – even in countries like Germany – soaring, and the ECB responded by making a double move.
Short term puts € 200 billion on the table deciding that will apply reinvestment flexibility of the PEPP portfolio, ie it will not use the securities only to deal with pandemic-related risks.
At the same time, however, the BoD of the ECB, after a 3-hour meeting, ordered the acceleration of the creation of a financial tool “raising” protection umbrella many more than 200 billion, for the most vulnerable economies so as not to be left in the mood of the markets.
According to the first information about the features of the new “bazooka” of Frankfurt The “pigeons” probably claimed a proud victory against the “hawks”. The mechanism, which is expected to be fully operational by September, does not divide the countries into “good” and “bad”, North and South. On the contrary, it will be at the disposal of any country that sees its borrowing costs increase without its own fault, ie without having taken actions that increase its debt or deficit. Then the mechanism will intervene, will buy its bonds while keeping interest rates at sustainable levels.
In addition, everything shows that the mechanism is not accompanied by any kind of heresy. In other words, a country will not need to take specific measures in the form of prerequisites in order to be activated, every time the … weapon trigger is pressed.
This time an occasion for the activation of the ECB it was not mainly Greecewhose name was absent from the headlines of major European newspapers for countries at risk – although borrowing costs rose sharply – but mainly Italywhich is a country too big to fail. It is characteristic that since March 20, Italy’s borrowing costs have doubled to 4.2%, a level prohibitive for a state that has to raise € 250 billion by the end of the year.
Upon hearing the decisions of the ECB, the markets reacted with smiles with the financial markets returning to green and bond yields falling. Now everyone is waiting for the promises on paper to be translated into deeds and to dispel any fear of a new debt crisis.
