The ECB’s behind-the-scenes preparations hint at how officials are bracing for the moment when bond markets will need to cope without large-scale interventions for the first time after more than seven years of nearly uninterrupted asset purchases.
Policy makers stopped emergency bond-buying last month and aim to halt regular quantitative easing in the third quarter.
The creation of a new crisis tool against a relatively benign market backdrop might mark a rare moment of the ECB getting ahead of the game rather than catching up under duress. By contrast, former President Mario Draghi’s OMT measure in 2012 and the Pandemic Emergency Purchase Program in 2020 were unveiled after financial turmoil had engulfed the region.
Already last year, policy makers discussed a precautionary instrument to prepare for so-called fragmentation risks, with officials from the region’s periphery lobbying for an unconditional purchase backstop, while peers from core countries insisted on some strings attached.
The debate was resolved when the Governing Council deemed in December that extra flexibility in reinvesting bonds maturing from its emergency portfolio would be sufficient. But the imminent end of QE and heightened uncertainty about the implications of Russia’s war in Ukraine has reignited concerns among some policy makers.
Financial repression comes in many shapes and forms. At its simplest it means holding down interest rates, so inflation runs hot and reduces the burden of paying back fixed interest debt. When that is accompanied by lower government spending, it can erode debt relative to GDP quite quickly.Click HERE to subscribe to Fuller Treacy Money Back to top