Wednesday

6th Jul 2022

ECB in nuanced denial of yield cap plans

  • ECB chief Mario Draghi - holding the answer to the eurozone crisis? (Photo: World Economic Forum)

The European Central Bank has failed to outright deny that a bold plan for the bank to bring eurozone government borrowing costs is in the offing.

The Frankfurt-based bank said it was “absolutely misleading to report on decisions which have not yet been taken and also on individual views, which have not yet been discussed by the ECB’s governing council."

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But the statement implies that the idea to put caps on bond yields - reported in Germany's Der Spiegel - may yet be debated.

According to the report, the bank is considering setting up country-by-country thresholds for sovereign bond yields, after which it would intervene by buying up the stricken states's bonds. The benchmark would be German bonds, seen as the safest in the eurozone.

The idea is extremely sensitive. It is likely to raise complaints that the ECB is overstepping its mandate. It is also set to aggravate a fear - particularly among fiscally prudent states such as Germany - that ailing eurozone countries will lose the incentive to carry out reforms.

A spokesperson for the German finance ministry was quick to criticise the idea.

Saying he was unaware of any such plans, the spokesperson added that "purely theoretically and speaking in the abstract, such an instrument would of course be very problematic."

It is "also wrong to speculate on the shape of future ECB interventions," he said, according to AFP.

Consideration by the bank on how to overcome the crisis come as the borrowing costs for Spain and Italy have in recent weeks been pushed to near unsustainable levels, with investors doubting in the longterm future of the single currency.

Some analysts have suggested that the ECB - with its theoretically limitless capacity to print money - holds to the solution to the eurozone crisis, which has lasted over two years, seen the toppling of several governments, and is now threatening core economies.

An editorial in the Financial Times Deutschland suggests that the interest capping rate idea differs from previous proposed solutions in that it offers a "sustainable" way to stem the crisis.

Germany gets its way on ECB bond-buying

The ECB has said it "may" buy Spanish and Italian bonds, but only if governments first sign reform pledges with the eurozone's bailout fund - a German demand.

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Angela Merkel is coming under mounting pressure from the Bundesbank and the sister party of her Christian Democrat group to block EU plans to make the European Central Bank the central supervisor of a eurozone banking union.

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