ECB Sets Crisis Fighting Tool Amid Warning of Risks

Christine Largarde, the President of European Central Bank said the economic situation in the eurozone is becoming more worrying amid the widening fiscal deficit while a new crisis-fighting tool that involves bond-buying and selling other securities at the same time to neutralize any interventions in debt markets would address fragmentation if the risk arises,

“The risk of an abrupt correction on Europe’s financial and housing markets is high,” the President of the ECB said.

“Risks to financial stability have perceptibly increased since the beginning of this year,” she commented this in her capacity as the Chair of the European Systemic Risk Board, the European Union’s financial risk watchdog.

“While the correction in asset prices has so far been orderly, the risk of a further and possibly abrupt fall in asset prices remains severe,” she added.

The comments followed an emergency meeting last week where officials accelerated work on the tool to defend the integrity of the euro region. Officials were forced to act following a blowout of Italian bond yields in the wake of their plan to tighten monetary policy in coming months. The new crisis-fighting tool is likely to feature purchases of debt from more highly-indebted nations.

Italy’s 10-year bond yield rose to 4 percent for the first time since 2014 in earlier June while Italy’s government debt has been above 150 percent of gross domestic product, up from 127 percent a decade ago.

The measure is meant to be finalized before the ECB’s governing council next policy meeting on July 20-21. Lagarde said that work is under way, and declined to divulge details on how it’s supposed to function.

“Suffice to say that fragmentation will be addressed if the risk of it arises,” she was quoted as saying to the lawmakers.

“And it will be done so with the appropriate instruments, with the adequate flexibility, it will be effective, it will be proportionate, it will be within our mandate. And anybody who doubts that determination will be making a big mistake.”

Lagarde restated officials’ intention to raise interest rates in July and September, signaling that concerns over financial-market tensions aren’t derailing the fight against inflation.

Euro zone government bond yields edged higher yesterday close to their multi-year highs as renewed inflation concerns and the ECB’s hawkish comments kept markets on edge.

Germany’s 10-year government bond yield rose 1.5 basis points to 1.753 percent. Italy’s 10-year government bond yield fell 3.5 bps to 3.756 percent, with the spread between Italian and German 10-year yields at 199.7 bps.

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