ECB Anti-Fragmentation Tool Will Have No Limits

ECB night

Link | The governor of the Central Bank of France and member of the ECB’s Governing Council, François Villeroy de Galhau, said in an interview yesterday that the tool being designed by the ECB to prevent fragmentation in the eurozone must send a message that there will be no limits. The more credibility it has, he said, the less it may have to be used. Villeroy defended the sale of some bonds before their maturity, which squares with the leaks and conjecture that circulated in the markets last week.

The Financial Times, meanwhile, said it expects the ECB’s actions to be tested, but it does not need to make explicit the levels at which it intends to maintain spreads (risk premia). In addition, the newspaper said it was in favour of sterilising bond purchases as in the programme implemented in 2010.

The governor of the Central Bank of Slovakia and member of the ECB Governing Council, Peter Kazimir, said yesterday that it was not only the ECB’s job to limit the risk premia of eurozone countries, which are also caused by the economic fragility of certain countries and by the eurozone’s incomplete architecture of a monetary union without fiscal backing. In his opinion, when we talk about fragmentation, we are often knocking on the wrong door, and the key and substantial issue is for countries’ economies to modernise, to innovate, to become more resilient to these problems.

For his part, the governor of the Central Bank of Finland and also a member of the ECB Governing Council, Olli Rehn, said that no country will automatically be eligible to benefit from the ECB’s forthcoming tool designed to limit the widening of spreads, implying a possible reference to the conditions attached to any ECB purchase of a country’s debt.
Assessment: we expect that, at least until the ECB Governing Council meeting, its members will be expressing their position on the anti-fragmentation tool that is being developed. In this respect, it should be noted that the position of the governor of the Central Bank of France is somewhat biased, as his country is one of those affected by the increase in sovereign bond yields and the risk premium given its high public deficit and the sharp increase in indebtedness in recent years.

For the moment, the mention of the tool is serving to calm Eurozone bond markets and lower risk premia, something that is also having a positive impact on the region’s stock markets. We will have to see how these markets react when the final design of this tool is announced, which, we still believe, will carry a heavy burden of conditionality.

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