Skip to content
All about finance. — Business — Bonds — Divergence — Agreed — Euro — Intervening — Finance

"ECB treads on risky ground"

Eurozone's Central Bank Increases Interest Rates, as Perceived by IFO Institute President Clemens Fuest; ECB Provides Financial Aid to Struggling Southern Europe, Evaluating Both Prospects and Constraints of Monetary Policy; Analysis by Wolfgang Ehrensberger.

,   and  Administrator
3 min read

"ECB treads on risky ground"

Clever Currency Chat:

Here's the lowdown on the recent ECB meet that saw a historic shift in policy. For the first time in over a decade, the Euro bigwigs cranked up interest rates by a whopping 0.5 percentage points - double what was initially planned! Inflation in the eurozone has hit a record high of 8.9%, prompting this decisive action.

BÖRSE ONLINE questioned renowned economist Clemens Fuest about the potential risks for highly indebted EU nations like Italy. He acknowledged that the impact on Italy's public finances from the higher interest rates will take a bit of time, but tax revenues boosted by rampant inflation could cushion the blow.

The ticking time bomb question: Is the Italian public debt sitting on a ticking time bomb with the rise in interest rates?

Clemens Fuest thinks it's more essential to evaluate Italy's long-term growth prospects and whether investors trust the Italian politics to chip away at their sky-high debt ratio. If that trust is lacking, it could become a challenge.

BÖRSE ONLINE also grilled Fuest about the ECB's crisis bond-buying program, known as the Transmission Protection Instrument (TPI), intended to assist troubled nations like Italy. Fuest expressed reservations about the program, suggesting it could encroach on the ECB's independence and warp incentives for economic policy.

The ECB's bond-buying program: A harmless helping hand or a dangerous distortion?

Fuest noted that interest rate differentials are crucial in a well-functioning capital market, as they reflect varying levels of risk assumed by private investors. The ECB's intervention risks crossing the line into state financing and could, in turn, set the wrong signals for future financial and economic policies.

Fuest drew parallels between the TPI and the bond-buying program OMT launched during the euro crisis. He argued that the conditions for a nation to participate in the TPI are less stringent compared to the OMT, making the ECB vulnerable to immense pressure to support specific member states.

Regarding the ECB's interest rate hike, Fuest praised the move as a strong signal demonstrating the ECB's commitment to normalizing monetary policy. He clarified that the era of negative interest rates is over, but deep negative real interest rates still persist.

Is this interest rate hike a case of better late than never?

With inflation rates on a skyward trajectory, Fuest recognized that the ECB's move was late, but considered it better than none at all. He believes the ECB should have exited from bond purchases earlier.

Lastly, Fuest hinted that the ECB still possesses the tools and intricate interest structure to tackle the current inflation surge. Whether they can successfully curb inflation remains to be seen in the upcoming months.

Italy's high debt burden means it's vulnerable to even marginal rate hikes, with potential risks such as a vicious cycle of higher yields, increased refinancing costs, and debt sustainability concerns. However, Italy's resilient covered bond market and temporary optimism in the bond markets offer some stability, despite systemic risks persisting due to Italy's dependence on favorable borrowing conditions.

  1. The debate over the European Central Bank's (ECB) Transmission Protection Instrument (TPI) raises questions about its potential impact on Eurozone finance, with economist Clemens Fuest suggesting it could potentially encroach on the ECB's independence and warp incentives for economic policy.
  2. In discussing the recent ECB interest rate hike, Clemens Fuest indicated that he agreed with the move as a strong signal demonstrating the ECB's commitment to normalizing monetary policy, yet he believes the ECB should have exited from bond purchases earlier to combat the current inflation surge more effectively.
  3. In regards to the Italian public debt, Clemens Fuest believes that its vulnerability to even marginal rate hikes necessitates careful evaluation of long-term growth prospects and the level of investor trust in Italian politics to reduce the debt ratio, lest it become a substantial challenge.
  4. Critics may argue that the ECB's bond-buying program, including the TPI, risks crossing the line into state financing and may set the wrong signals for future financial and economic policies, leading to a dangerous distortion in the Eurozone's capital markets.
German President Clemens Fuest weighs in on historical interest rate adjustments by the European currency overseers, potential ECB assistance for heavily burdened southern nations, and the prospects and constraints of monetary policy. Reported by Wolfgang Ehrensberger.

Read also:

    Related

    Latest