The ECB's austerity "starting gun" caused a huge shock in the European bond market, European debt risk indicators were close to the "danger zone", and the "financial polarization" (financial fragmentation) within the euro zone intensified.
Some market analysts warn thatInvestors must seriously consider the risk of a "collapse" in the eurozone, as the ECB may not be able to do anything about it in the face of high inflation.
Financial differentiation intensifies
On Thursday, the ECB announced its decision to phase out bond purchases in July and plans to raise interest rates at least twice this summer to cope with record high inflation.
Despite market expectations, the austerity plan still caused waves in the European bond market after the "official announcement", with investors selling government bonds of marginal countries such as southern Europe, especially debt-laden Italy.
As a barometer of financial pressure in the euro zone, the spread between Italian and German benchmark 10-year bonds widened to 2.21% on Friday.Reached the highest level since May 2020, approaching the threshold of 250 basis points ("danger zone").
ECB officials are trying to reassure markets in the face of growing financial divisions.
Francois Villeroy de Galhau, governor of the Bank of France and a member of the ECB's governing council, said:
"We always know how to deal with this divide: in 2010, 2012, 2020, we use different tools each time. No one, including the market, should have any doubts about our collective will to prevent division. "
ECB President Christine Lagarde also said at a press conference that the ECB will deploy new tools if necessary.But when asked for details, Lagarde was vague:
There is no specific level of rise in yields, or lending or bond spreads will unconditionally trigger this or that situation. We will determine how and when such risks are likely to arise according to the situation of each country, and we will prevent them.
Some analysts pointed out that after the ECB stopped increasing its holdings of PEPP in March, the number of Italian bonds purchased under the program decreased during the period from April to May, indicating that the ECB has not yet adjusted countries' reinvestment.It shows that it is not yet uneasy about the spread.
"whatever it takes" won't work.
Ms Lagarde's comments are not enough to allay market concerns due to a lack of details, after all, the Greek debt crisis nearly tore the eurozone apart a decade ago.
Eric Peters, chief investment officer of One River Asset Management, believes investors must seriously consider Europe's "collapse" because "whatever it takes" will not work with 8 per cent inflation.
According to Peters, no two crises are the same. Inflation in northern Europe was almost zero in 2010, 2012 and 2020. In 2012, when Mr Draghi announced that the ECB would defend the euro "at all costs", European inflation was 2.35 per cent. At that time, the European Central Bank launched unprecedented monetary easing to save euro zone countries on the brink of bankruptcy and defuse the euro crisis. Peters says:
In a world where inflation is always low, the power of central banks to create money to prevent fragmentation seems unlimited and at no cost.But in a world where inflation is high and rising, easing has the potential to push inflation higher and unanchor expectations.
Peters pointed out that investors must consider all the results and assess when EU inflation has reached 8.1%.The possibility that Nordic countries are willing to bear such costs for their southern neighbours.