The European Central Bank’s rate-setting council will hold an unscheduled meeting Wednesday “to discuss market conditions,” with borrowing costs for several countries having risen after the bank said it would raise interest rates.
The bank last week announced the hikes in July and September without specifying how it would protect countries sharing the euro currency if borrowing costs rose excessively — as they did in the European debt crisis in 2010-2012. That's a potential concern for heavily indebted governments, most notably Italy.
The spreads for Italian and Spanish debt over safe German government debt — a key fear index for the 19-country eurozone — have risen after the ECB made only unspecific promises to prevent financial “fragmentation,” or interest rates in individual countries that are so high that they don’t reflect the bank’s benchmarks.
The ECB has a bond-market backstop in which it could step in and buy the debt of a troubled country. That tool helped calm the debt crisis a decade ago after the bank announced it in the wake of its then-President Mario Draghi’s promise to do “whatever it takes” to keep the eurozone from breaking up. But that program, which never actually had to be used, can come with tough conditions for reform and governments may be reluctant to turn to it.
Holger Schmieding, chief economist at Berenberg bank, said the “situation today is different from the euro crisis a little more than a decade ago” because countries have improved growth prospects and the ECB has the bond-market backstop in its back pocket if needed.
Current conditions “should not present an imminent risk even for fiscally challenged Italy,” he said.
Interest yields on Italy's 10-year government bonds have risen from around 1.2% at the start of the year to 4.1% on Wednesday. The ECB's pandemic support programs, including 1.7 trillion euros ($1.8 trillion) of bond purchases, helped keep government borrowing costs low across the eurozone. That program, however, came to an end in March, and markets are now looking at increases in interest rates from record low levels.
The ECB's surprise meeting comes the same day that the U.S. Federal Reserve is expected to announce its largest interest rate hike since 1994. Europe's bank has trailed the Fed and other central banks in raising rates to combat decades-high levels of inflation, including the Bank of England, which has hiked rates four times since December and will meet again Thursday.
But now the ECB has scheduled rate increases for July and September and indicated September’s increase might be a larger-than-usual half-percentage point.