The European Central Bank’s secrecy regarding any details of a possible new anti-fragmentation tool risks ending up into a self-fulfilling prophecy, as bond markets in Southern Europe, including Greece’s, are already feeling the pressure.
Investors are already testing the ECB’s resolve and responding to its refusal to reveal any new support instruments, sending the region’s bonds into a strong sell-off for days. Frankfurt has reportedly decided not to make any early announcements; it will instead activate its new “weapon” if and when needed, as it did with the emergency PEPP program, when there had not been the slightest leak.
According to many analysts, however, the region’s bond market is already in crisis, underlining the speed at which spreads have grown. On Tuesday the yield of the Greek 10-year bond jumped to 4.72%, which is the highest point of the last 4.5 years, and the spread with the German bund broke the barrier of 300 basis points to reach 305 bps for the first time since March 2020, while just before the activation of PEPP on the 18th of the same month it had peaked rapidly at 420 bps.
The Greek spread may be quite far – at least 100 bps – from the levels of the pandemic crisis, which in the past have proved to be prohibitive for new borrowing, but history shows that this gap can be bridged within in a few days. In just 10 days, the spread has already increased by almost 25%.
The reluctance of the ECB to reveal any of its plans is due, according to Bloomberg, to the fact that the Governing Council considers there is a low probability that the member-states’ debt sustainability could be immediately jeopardized. This is because many countries have made significant moves to manage their debt, increasing the average maturity of outstanding bonds and somewhat protecting them from short-term changes in yields.
The chief of the European Stability Mechanism (ESM), Klaus Regling, noted on Monday that despite the high debt levels in countries such as Greece, servicing costs are historically low and debts have long maturities.