Lagarde’s weak communication, gaffes, hawks and leaks: thus the ECB arrived weakened in the new tug-of-war with the markets

Give it slip of 12 March 2020 (“We are not here to close the spreadit is not the function of the ECB “), which saw it forced to specify a few hours later the” full commitment “of the European Central Bank to” avoid any fragmentation“, at the a week ago reticence on the details of a new one anti spread shield which the Eurotower was forced to on Wednesday dedicate a emergency summit to calm the wave of sales of bonds from weak Eurozone countries. In the profession of central banker the communication that’s all and Christine Lagardejudging by the reactions of markets to his interventions in the most delicate phases of the pandemic and now of the “perfect storm” caused by theRussian invasion of Ukraine, handles it with difficulty. This is not good news for the country that has to refinance a debt equal to 150% of its gdp and on whose fate a (new) arm wrestling between Frankfurt and investors destined according to analysts a do not run out the soon.

“Last Thursday’s communiqué remained on vague, triggering an earthquake on the markets. On Wednesday he tries to put a piece of it but continues not to give details and leaves many question marks “, comments the economist Angelo Baglioni. “It is evident that Lagarde tries to mediate between the different positions but does not have the credibility and the clear and strategic vision of the predecessor “. All too easy to remember that a Mario Draghi in July 2012, at the height of the sovereign debt crisis that came close to splitting the Eurozone, it was enough guarantee that the central bank would have done “whatever needed per preserve the euro” to stem speculation against Italy and reverse the course of the differential between the BTP and the Bund, which had widened up to 536 basis points. There was no need to really intervene: the Outright monetary transactions presented a few months later – potentially unlimited purchases of securities of countries in “serious macroeconomic difficulty”, which in exchange should have signed a memorandum con il Mes – were never used. Now words are not only not enough: they tend to make the situation worse.

Certainly it does not help that the 25 members of the board of directors are divided on the pace at which it will have to proceed normalization of a monetary policy for years ultra-expansive and accompanied by massive purchases of government bonds which have supported economic growth and “drugged” spreads. And that i hawks like Dutch Klaas Knot cheering publicly, in an anti key inflationfor squeezes on rates above 50 basis points in September (after the 25-point hike announced for July). But for sure a week ago the former director of the International Monetary Fund failed to calm them in the bud fibrillations inevitable after “people involved in discussions” had leaked on Financial Times the intention of the ECB to announce a new tool to contain spreads and avoid the aspect of the notorious fragmentation. That is the increase uncontrolled of the yields of the bonds of some countries, up to the potential breakdown of the Eurozone.

The expectation had been created at that point: merely to confirm that the proceeds of the securities purchased under the pandemic program Pepp that will expire will be reinvested in a flexible way – therefore, if necessary, favoring bonds of “weak links” – it was considered disappointing. As Baglioni had pointed out in an analysis on lavoce.infoleft many doubts about what the Frankfurt institution would be concretely able to do in the event of an attack on the Italian debt: “Will the ECB have to wait for the bonds of other countries to expire in order to buy BTPs? Or it will be willing to anticipate the purchase of BTP to be more timely? We do not know”. According to estimates by Societe Generale, even if the Eurotower reinvested the entire flow of German and French bonds in Italy, the amount available would be much lower than the net purchases of Italian bonds made so far. Hence the blaze of returns in Rome and Madrid and the bad signal arrived from the BTP auction on Tuesday when the rates of those at 3 and 7 years rose to the highest levels since the years of the sovereign debt crisis.

The new meeting of the Governing Council called to run for cover has formalized the commitment to launch a new shield but it also took time, postponing all at a later date. “The message is that we will have to wait at least for the next Council meeting, halfway through July, and it is not even certain that the green light will arrive at that point ”, explains the professor at the Cattolica in Milan and former member of the Banking Stakeholder Group of the European Banking Authority. Dense darkness even on conditionality that will accompany the new instrument: the era of memoranda with the Mes envisaged by the Outright monetary transactions developed (and never used) at the time of Draghi seems definitively faded. But what will they be replaced by? The commitment to respect the Stability pactnow suspended and under review?

The question is crucial so that the new provision is also promoted by the “hawks” and is not targeted by appeals. Isabel SchnabelGerman economist who is part of the executive committeeon Tuesday afternoon he apparently opened up to the new instrument by explaining: “We will not tolerate changes in financial conditions that go beyond fundamentals and threaten the monetary policy transmission“. But he also recalled that at the height of the pandemic, the Pepp purchasing program “alone could not reverse the fragmentation”, which only returned “when a major Recovery fund europeo“. As if to say: the actions of the ECB alone are not enough.

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