ECB rebuts attacks as Visco signals it can buy Italian debt
BLOOMBERG, New York
The European Central Bank signaled its ready to buy more debt of nations such as Italy to calm mounting financial panic, and pushed back against political criticism of President Christine Lagardes handling of the coronavirus crisis.
A day after Lagarde sent Italian bonds into a tailspin and stirred memories of turmoil by saying the ECBs job isnt to rein in yields, her colleagues went on the counterattack. Italian Governing Council member Ignazio Visco told Bloomberg Television that officials can skew purchases toward the worst-hit countries such as his.
We can frontload, we can concentrate on particular jurisdictions according to the circumstances, Visco said in the interview. There is no question that if there are movements in the spreads caused by fears about the effects of coronavirus, this will make more difficult our provision of liquidity and the impetus we are giving to the economy.
Italian bonds erased losses after Bloombergs interview with Visco on the prospect of the ECB front loading purchases of Italian debt. The rate on 10-year bonds fell 18 basis points to 1.58% as of 11:41 a.m. in London, after earlier rising as much as 19 basis points.
The gap between Italian and German bond yields narrows about 30 basis points
Yesterday Lagarde wasnt so clear about a possible ECB purchase of bonds, so the ECB is trying hard now to convince market that it stands ready, said Joost Beaumont, senior fixed-income strategist at ABN Amro. Viscos remarks go in this direction and his clarification seems to be working.
Surging bond spreads the difference between yields on debt of stressed nations and safer options such as Germany were a hallmark of the euro zones 2012 debt crisis that almost broke up the currency bloc.
The ECBs view is that the market misinterpreted Lagardes comments, and that if spreads are driven by liquidity needs or a flight to safety, thats absolutely the central banks job. Despite 2.6 trillion euros ($2.9 trillion) of asset purchases so far and hundreds of billions more to come, it doesnt see any imminent risk of breaching European Union law banning it from financing governments.
We will not tolerate any risks to the smooth transmission of our monetary policy in all jurisdictions, ECB Chief Economist Philip Lane wrote in a blogpost. We clearly stand ready to do more and adjust all of our instruments, if needed to ensure that the elevated spreads that we see in response to the acceleration of the spreading of the coronavirus do not undermine transmission.
Lagarde didnt offer the broad-spectrum stimulus that financial markets may have wanted, but shes taken appropriate action to deal with the shock at hand. Her comments on spreads were ill-judged and have required a lot of subsequent clarification, but markets should take her advice dont overinterpret her.
Lane added that officials will cut interest rates if needed. Bank of France Governor Francois Villeroy de Galhau declared earlier that the ECB will use all the flexibility it has to combat fragmentation in the euro area if necessary.
We will use our full firepower, with maximum agility and all possible flexibility, Villeroy told Frances Radio Classique. We can buy more of certain country debt and less of others.
Policy makers unexpectedly opted not to cut rates on Thursday, instead pledging to spend an extra 120 billion euros on quantitative easing by the end of the year. The ECB will also start a new program to make it easier for banks to support smaller companies hit by cashflow disruptions.
In rare swipes at the central bank, French President Emmanuel Macron and Italian Prime Minister Giuseppe Conte both rebuked the decision. Macron said he didnt think itll be enough, and Conte said the task of the ECB is not hindering but facilitating.
The ECB was so keen to roll back Lagardes remarks, that it even included a rare addendum in its official transcript of its press conference, referring to comments she made afterward in an interview with CNBC.
