“No reason to worry about interest rate differentials in Europe”, according to Germany
German Finance Minister Christian Lindner said on Thursday that there was “no reason to worry about interest rate spreads in Europe”, reacting to fears of debt market fragmentation. sovereign in the euro zone.
“We are seeing an increase in rate differentials between Member States. But there is no reason to worry (…) The economic and monetary union is stable,” said Christian Lindner, before a meeting with his EU counterparts in Luxembourg.
“There is no reason to be nervous because the risk premiums, the spreads, are a little higher than they were a few months ago,” he said.
The German minister called for a break with the generous public spending policy adopted since the start of the coronavirus crisis in 2020. “We all need to return to sound public finances. We must reduce our deficits. We need a reliable path to debt reduction in all member states, including Germany,” he stressed.
The prospect of a rise in rates by the European Central Bank (ECB), intended to counter inflation, set the markets on fire, with a surge in the rates of certain countries of the euro zone, to the point that the monetary institution had to work on Wednesday to reassure investors.
The interest rates of the most indebted countries, in particular those of Italy which are particularly watched, have increased much more than the German reference rate (the Bund), a sign of investor mistrust.
The ten-year Italian rate exceeded 4% on Monday, a level not seen for eight years, while it was still at 0.50% in the summer of 2021. The gap with the Bund widened to 2 .50 percentage points. These figures raise fears of a new debt crisis in the euro zone after that of 2011/2012.
The ECB has decided to hold an exceptional meeting on Wednesday to show its determination to counter any slippage in rates in the euro zone and any panic over Italian debt. At the end, the Frankfurt institution confirmed that a new “anti-fragmentation” instrument would be designed and instructed its teams to “accelerate” its development, without, however, giving details on this instrument or its timetable. ‘adoption.
The institution will raise, at its next meeting on July 21, its key rates by 25 basis points, after having stopped its net purchases of assets. Its president Christine Lagarde also warned that there would be a new series of rate hikes from September.
This change of course is accompanied by a risk of fragmentation on the sovereign debt market in the euro zone, which would cause European states to borrow at widely divergent levels, with those deemed to be the most fragile being penalized because investors are demanding more high risk premiums.
The Spanish Minister of the Economy expressed concern about this on Thursday. “The ECB’s action is clearly aimed at ensuring financial stability in the euro area and avoiding any risk of fragmentation, and this should be our priority now in an environment of volatility and instability caused by Putin’s war against Ukraine,” said Nadia Calvino in Luxembourg.
“This intention, confirmed by the ECB, to tackle the risk of fragmentation of monetary policy is very important”, also estimated the European Commissioner for the Economy, Paolo Gentiloni. “It’s reassuring for the markets. And of course, we must also avoid believing that monetary policy alone can solve the situation,” he added.
“We must adopt prudent fiscal policies, especially for countries with high debt, we must focus on reforms, investments,” he advocated.