John Thys | Afp | Getty Images The European Central Bank (ECB) announced Wednesday that it plans to launch a new tool to address the risk of eurozone fragmentation, in a move designed to allay fears of a new debt crisis. The decision comes after the central bank surprised market participants with an emergency meeting to address the higher borrowing costs for many European governments. “Since the gradual normalization process began in December 2021, the Governing Council has committed itself to taking action against the emerging risk of fragmentation,” the ECB said in a statement. “The pandemic has left permanent vulnerabilities in the euro area economy, which in fact contribute to the uneven transmission of the normalization of our monetary policy to all jurisdictions,” he added. The comments reflect the recent rise in bond yields over the past week or so. Following a regular policy meeting last week, the ECB proposed a more aggressive tightening policy, but failed to offer new measures to support the bloc’s heavily indebted nations. This sparked some nervousness among money managers about financial fragmentation and led to an increase in bond yields. Italy’s 10-year bond yield topped 4% earlier this week – with one economist saying those levels “could eventually become a problem” for the Southern European nation. To address these concerns, the ECB said on Wednesday it would reinvest the acquisitions in the Bond Extraordinary Purchase Scheme – referred to as PEPP – in a flexible manner and called on its team to “accelerate the completion of planning a new . “ Isabel Schnabel, a member of the ECB ‘s Executive Board, said in Paris, France, on Tuesday: “Our commitment to the euro is our tool against fragmentation. This commitment has no limits. And our history is to intervene when needed. it is committed to commitment. “ European countries faced significantly higher borrowing costs in the wake of the sovereign debt crisis in 2011. Some of the imbalances have been addressed, but there are still concerns for the region as a whole, especially as it has a monetary policy for 19 different fiscal positions.
Market reaction
The yield on the 10-year Italian bond fell further after the ECB announced it was trading below the 4% threshold. Borrowing costs for other eurozone governments also fell on the news, with Greece’s 10-year bond yield trading more than 7% lower. In the foreign exchange markets, the euro traded higher against the US dollar, continuing the trend that was observed earlier in the session, when the news was released that there would be an extraordinary session. Shares of Italian banks, which had rallied earlier on Wednesday, continued to trade higher after the monetary policy decision. Mario Senteno, a member of the ECB’s Governing Council, said a faster normalization of monetary policy was a risk that could not be ruled out, according to Reuters. The central banker added that the rate of interest rate hikes will be “gradual”.
