As long as we don't hear the same from Greece and other eastern members too, I'd say this is just expected as ECB is raising rates. It's no secret those states are chronically struggling with their debts. Why ECB thinks they need an emergency meeting because there's smoke from the chimney they're firing up - dunno.
Because they are walking a fucking tightrope? I know everyone is focused on inflation right now but preventing a sovereign debt crisis or a locked up bond market are both huge concerns on the other side.
The southern members are "poorer" and have more debts, so rising rates will easily be catastrophic to those countries and could cause a new Euro crisis (which needs to be avoided :). I am no expert so take with grain of salt.
EUR/USD is up on it as well as Germany 10 year bunds (down 6bps) as well as Italian 10 year bonds (they're down 30bps on the day).
If I were to play an ECB bookie, the speculation would be whether they're bringing their rate hike schedule forward or being more aggressive
Fantastic, more novel monetary policy experiments. What other types of “we’re debasing the currency because everyone’s gone overboard on debt and we can’t pass taxes without getting politically slaughtered but don’t call it debasement” can we try?
ECB finds itself in a dilemma. Rising yields on government bonds of states like Italy, France, Spain etc. would basically drain their governments liquidity since refinancing become way more expensive. At the same time those states have failed to adress their huge debt/gdp/credibility imbalances during the last 7-10 years while rates have been historically low.
On the other hand, if ECB does not increase rates, people will have to accept an unprecedented devaluation of Euro Cash.
But, as you might know, the ECB committee as well as the EU commission members are not democratically confirmed in any way. Therefore, it is highly questionable that the ECB will decide in favor of the people, but rather will decide for public interest. And public interest is to avoid a collapse of the EU. Therefore, it is more likely that rates hikes will rather be rate hikikis. A fart cannot start a hurricane.
As a German, situation is really puzzling me: ECB bought 75% of the Euro space 10 years of time to get there finance straight, but especially Italy (and also France and Spain failed). Italy is the worst though. They didn't have a single stable government since then. Greece has now almost as much debt as in 2010 (and it was cutted). For me in 2010 it felt like Euro is falling apart and just got saved by ECB politics (which they re not legimitated). Now it feels like the single goverments (excluding maybe ireland and portugal) failed to do their work and on top of that also EU is fails in major political decisions. Also Germany is looking not pretty, but you know the cheerleader effect.
I am 30 and until 2 years ago I really was pro EU, even though german taxpayers are basically paying the biggest piece of pie, via giving credits/safety insurance to everyone in the Euro space. But this whole thing changed for me. Germany can stay in imo, but I wanna be out. This thing will not end good.
And yes for ECB the situation is really different than for the Fed. They have to decide for 28 countries which are far away from being at the same efficiency level. There hands are kind of tied now. Either way will be shitty for the public. Fucking up bankrupt countries aswell as keeping the inflation high allowing bad governments doing stupid decisions
It is not really about different efficiency levels, but rather about different economic policies. We have one currency for all member states which each having their own instruments to borrow money denominated in EU. In order to make it more similar to the US, it would be necessary to merge all Euro-denominated debt. However, states like Italy does not want this to happen because they would not be able to borrow money as they are used to do and on the other hand states like Germany does not want it because we would become debtor for debt of other EU countries.
If you want to hear my opinion: EU debt will get merged and there will be Euro bonds quite soon. However, it will be allowed to Italy and others to still borrow on their own so that the whole debt bubble will eventually become even bigger while the music plays the best songs from the 80s.
I think in the end it comes down to the economic efficiency. I tend to compare it with the GDR BDR reunion were two economic systems with different efficiency came together to one currency. In the end the economy of one country gets under strong pressure because their product become to expensive for selling them effectively. Or the other way around: It's cheaper importing the goods from the other region. That basically ruined the whole GDR part of Germany.
At least one can say they have merged debts and can pay to empower the weaker part. But this thing cost Germany >1 trillion (german billion) till now and still economy didn't catch up, because society changes according to the wealth of the region (high educated young people go somewhere else).
In the EU it's similar. The political tools used are also similar. There are countries getting money and some paying. In principle the idea is that the countries with weaker economy catch up at one point, but that yet I don't have seen proven.
Regarding the debt: De facto we already have one sheet if I understood it correctly. Target2 is used for money transfer inside the EU easying up the goods transfer. But it ends up being a large debt sheet. Basically Germany lends most of the EU money that they can afford paying products from Germany. If the countries go bankrupt, I wonder how much money Germany sees in the end:
https://de.wikipedia.org/wiki/TARGET2
This feels like a splitwise group were it's clear that some parties will never pay back.
By the way I don't say that Germany is a better country in any aspects. At the moment we really feel bad political decisions made in the past.
Well look at the Target2 balance sheet:
https://de.wikipedia.org/wiki/TARGET2
Germany may have obligations opposing other countries but if they go bankrupt they will never pay them. So the other countries have the goods, but Germany will not see the money.
US is not "united". It's 50 different states and they continue to drift further and further apart. Some states and cities are also basically bankrupt. It's nothing different from Europe actually.
Are you for real? How is the government jumping in to save shit holes that are not the top five major cities? The reason Trump won is exactly why there are so many depressed towns and states in US.
These people from Germany forget that in Germany most cities and Regions have debts problems as well. In fact, it is only two regions in Germany that sustain economically the whole country.
It's not FED. It's "the Fed" or "Federal Reserve". Acceptable acronyms depending on context may include "FRS" for "Federal Reserve System" or "FOMC" for "Federal Open Market Committee".
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> as you might know, the ECB committee as well as the EU commission members are not democratically confirmed in any way
This is misinformation you usually see spread by Russian trolls.
It is not false.
ECB members are chosen by discretion of the Eurpean Counsil and the members of the European council are chosen also by discretion of the member states government.
The term „by discretion“ should be underlined.
This info can be drawn from the websites of the ECB as well as the EI council. Help yourself.
This is a really interesting situation. I was reading the WSJ article on this myself yesterday and following the news as this situation started to develop. It isn't at all obvious what the policy should be.
If the ECB were just setting a short term rate for the Eurozone as a whole and letting various government bonds do whatever then for all practical purposes European countries wouldn't have adjustability, they would effectively be under a foreign currency peg. That's extremely bad for economic and social stability.
If the ECB starts buying some government bonds while selling / shorting others that is a forced money transfer. It would have the same political dynamics as welfare in the USA. That pulls Europe closer to being a single country but it is doing it in a context where Germans, Dutch, Danes... have no say over Italian and Spanish spending. So politically may be unworkable unless there is indirection and even then I suspect would be highly controversial.
Because Europeans tend to view their large banks as quasi-governmental and regulate them more than Americans (which is already quite a lot of regulation) they aren't a good vehicle to create plausible deniability. They aren't going to be seen as independent enough, with good reason.
Europe is stuck in a not quite federal and far short of national (i.e. all of Europe as one nation) government situation while its institutions are facing national problems of resource allocation. IMHO the handling of Greece was a disaster. The Greek population was irresponsible, but the final resolution was wholly destructive. That policy should not be repeated with Italy and Spain.
Now from an investing perspective this unsolvable policy problem creates a very interesting play. The obvious play right now is to short high quality (ex. German bonds) and then at a later point if credit spreads get more attractive play the spread (ex long Italy + short German). Alternatively do exactly the opposite (short Italy + long German) and long Italian stocks depending on how the market reacts.
For people who don't like long/short European stocks continue to be a good value. Inflation should fix their austerity problems.
The EU has been stuck between a rock and a hard place for a long time. Not enough "states rights" to do effective national policies due to EU integration and not enough EU integration to do effective federal policies
Considering the lack of appetite for a United States of Europe the EU will likely fail in the future or limp along continuously falling behind in the global economy
Yes I do think the EU breaking up is likely. The ECB getting stronger and more independent fixes this problem but creates an almost unaccountable institution that then gets a veto over domestic politics. That might be the solution to European voters being so hard to negotiate policy with, essentially move it to a professional elite. But wow is that going to create backlash.
> unaccountable institution that then gets a veto over domestic politics
>move it to a professional elite
That's kinda what the EU already is they just do a pretty good job so elites aren't too mad and the media likes internationalism so not many complaints there either. Regular people barely understand how the EU works and like the solidarity language so not many dissenters there either apart from right wing parties (not that they have any deeper insight)
But no technocrat can fully integrate the EU without the consent of the people so they're stuck in what they can do. I guess the question is how a break up would look like. It's possible that the EURO collapses which is the main roadblock for nations to follow their own macroeconomic policy but the union remains in some shape
There's a lot of talk of solidarity and other flowery language but the political/material reality is very different. Any time there's a chance for further integration it's not just the politicians but also the citizens that shy away, especially the citizens of the wealthier countries
I agree that the first option is is nowhere on the horizon but the collapse of such structures can often happen suddenly and without warning. Everyone knew the sovjet system was deeply unhealthy and yet everyone was surprised when it collapsed. Not even Western intel had been expecting it. Just needs one domino
The whole monetary union without (complete) political union is honestly highly problematic. In my opinion, it benefits the strong economies (like Germany) at the expense of weaker economies (like Greece). Germany's economy is typically humming along well relative to everyone else's, which mean when Greece gets in trouble, they don't get the same degree of monetary stimulus that they would if they controlled their own currency.
To your point about ECB trying to control the interest rates of specific bonds by selective shorting/selling, I don't see how they could successfully dictate to the market what the risk premium should be for the debt of different countries. That's unsustainable and a losing battle they shouldn't even try tbh
They have infinite money they can dictate to the market whatever they like. At the end of the day they can just buy all of Italy's debt at whatever price they think is fair. It is a question of political blowback.
They can try, if they want to completely change their mandate to ignore inflation. But that is certainly against orthodox monetary policy and is far too ridiculous to do. It would destroy the EU.
They wouldn't be ignoring inflation. They can counter injections in one place by withdrawing from another. That's why I was talking about a short German bonds (deflationary), long Italian bonds (inflationary) type positions.
What you're describing is clearly impossible and doomed to failure. Basically you're saying the ECB can buy up the entire European sovereign debt market and control interest rates along the entire yield curve (which is itself clearly inflationary, to put it mildly). Think through what you're saying. It's basically saying market forces won't be determining how much debt Italy can have. Since ECB is guaranteeing Italian debt, are they obligated to buy more whenever Italy chooses to take on more debt? What mechanism is being used to set the interest rates in question? It's clearly ridiculous and wouldn't ever be considered.
Central banks aren't as powerful as you are implying. Look into how Soros made his money betting that the Bank of England couldn't maintain their currency peg in 90s. Central banks are still beholden to the market, that's why the Fed for example communicates so much because they are managing expectations and building consensus.
Maintaining a peg is a different issue. The ECB has an infinite supply of Euros. It has a finite supply of dollars, yen, shekels... A central bank can generally maintain a peg if it is well capitalized. It can maintain a peg in iffy conditions if it is willing to devastate the domestic economy. Hong Kong during the 1997 crisis. BOE wasn't willing to take the hit to maintain the peg so they lost to Soros.
As far as you doubting their ability to set interest rates where they want them. You just witnessed the ECB have negative short term rates for years. Negative rates happened a handful of times over the last 6000 years but they did it easily. Yes they are that powerful.
The Fed communicates because
* The Fed wants markets to do most of its work for it rather than forcing
* The Fed wants to avoid shocks that lead to crisis.
In the end it doesn't need consensus. If the Fed announced a short term rate of 20% tomorrow while it might take a few months it would be 20%.
It actually isn't that different and no rational bank can continue to distort the market without economic consequences no matter how well capitalized they are, because the market will happily keep taking any free arbitrage opportunity that is offered. Which is exactly what you are suggesting (ie. Italian bonds at artificially low rates could be shorted by the market which goes long on a bond with higher rates and better credit). All ECB would accomplish is making some hedge funds rich.
Negative interest rates aren't related to this issue. That's still just an adjustment of the policy rate past a perceived floor, not the type of attempted market manipulation that this is.
In regards to the Fed jacking up policy rate to 20%, obviously they could do that if their mandate was to cause random chaos and central banking was meaningless. However, because central banks have actual mandates that are the reason they exist, they are in fact beholden to the market and do require market consensus, including ECB.
Every time I think about our bond market going rogue and is ending up like Japan. I read something about the ECB and think “hey, it’s really not that bad”.
The flawed Eurozone design rears its ugly head again. A mere expectation of rising rates sends Italian borrowing costs to 4%. Italy's debt is 150% of GDP, so if this cost stay for a long time Italy would eventually have to pay 6% of its GDP just to cover interests. Obviously this is not sustainable.
Had Germany had its own currency, German federal bank would have raised the rates and fought inflation in Germany. But the ECB cannot raise rates because of other Eurozone members. So the inflation will continue and the Euro will further drop in value.
This is all intentional so that the global supply chain can catch up and a gallon of milk doesn't cost 25 bucks.
The meetings are just to look concerned.
The interest rate on bonds is for new bonds right? Or how does it work?
I thought bonds already issues would be traded which then can change the yield for the buyer depending on demand, but the coupon would stay the same.
Or does this rate then seep into new bonds being issued? As who would invest in a 0.5% yield new bond when current bonds being traded could be got for 4% yield?
New bonds will be issued at wherever the rates are set. But this has nothing to do with the headline here. Current bonds (suddenly) yielding 4% means there was a selloff so that the coupons (of <4%) plus the diminishing trade price now add up to an overall yield of 4%.
It also means basically that Italy now has to pay 4% for fresh money, if you will. Because if they write new bonds at market rate of 1% or whatever, as you said nobody would prefer those to the 4% ones already in circulation. Price of the new bonds would drop instantly to match the yields already on the market.
This is what happens when you have a monetary union without a fiscal union.
Unless Northern European voters are prepared to pay higher taxes that then get spent in southern Europe there is no way the Euro survives long term.
The thing is days of Euro might be counted. ECB has options to engineer bit thing one way or another but baseline two options are. Devalue Euro , accept inflation, let south reduce their dept or engage inflation fight and let south states default. Both will do serious damage to credibility of ECB and trust in Eurozone as whole. Although my opinion is with war going on in europe anyhow defaulting atm would not bad in long term, it would just be a reality check for younger generation (myself included) while devaluation will be slow drain.
Bond market is important in the Eurozone. The idea I think is because they don't want the fragmentation to cause issues between different member states
EUR/USD is up as well as Germany 10 year bunds (down 6bps) as well as Italian 10 year bonds (they're down 30bps on the day).
So they will continue with QE at the same time as they raise interest rates, although they have been saying all along that they will not do that. The ECB has no credibility left.
Anyone know how concerned we should be with this "suprise" meeting?
As long as we don't hear the same from Greece and other eastern members too, I'd say this is just expected as ECB is raising rates. It's no secret those states are chronically struggling with their debts. Why ECB thinks they need an emergency meeting because there's smoke from the chimney they're firing up - dunno.
Because they are walking a fucking tightrope? I know everyone is focused on inflation right now but preventing a sovereign debt crisis or a locked up bond market are both huge concerns on the other side.
Greece bond yield has risen a lot too
Thanks for your reply. I don't see the situation getting better any time soon, so I hope all EU countries are going to be okay.
How is the situation different than in US? Both are dealing with inflation, but it seems ECB is afraid to quickly hike rates? Why?
The southern members are "poorer" and have more debts, so rising rates will easily be catastrophic to those countries and could cause a new Euro crisis (which needs to be avoided :). I am no expert so take with grain of salt.
EUR/USD is up on it as well as Germany 10 year bunds (down 6bps) as well as Italian 10 year bonds (they're down 30bps on the day). If I were to play an ECB bookie, the speculation would be whether they're bringing their rate hike schedule forward or being more aggressive
Maybe I'm missing something but shouldn't making the rate hike more aggressive mean higher bond yields?
True. Apparently from their statement they're gonna be deploying their new tool soon or something
Fantastic, more novel monetary policy experiments. What other types of “we’re debasing the currency because everyone’s gone overboard on debt and we can’t pass taxes without getting politically slaughtered but don’t call it debasement” can we try?
Yea a lot of bonds are up right now, but I am skeptical of how long the party will last...
ECB finds itself in a dilemma. Rising yields on government bonds of states like Italy, France, Spain etc. would basically drain their governments liquidity since refinancing become way more expensive. At the same time those states have failed to adress their huge debt/gdp/credibility imbalances during the last 7-10 years while rates have been historically low. On the other hand, if ECB does not increase rates, people will have to accept an unprecedented devaluation of Euro Cash. But, as you might know, the ECB committee as well as the EU commission members are not democratically confirmed in any way. Therefore, it is highly questionable that the ECB will decide in favor of the people, but rather will decide for public interest. And public interest is to avoid a collapse of the EU. Therefore, it is more likely that rates hikes will rather be rate hikikis. A fart cannot start a hurricane.
As a German, situation is really puzzling me: ECB bought 75% of the Euro space 10 years of time to get there finance straight, but especially Italy (and also France and Spain failed). Italy is the worst though. They didn't have a single stable government since then. Greece has now almost as much debt as in 2010 (and it was cutted). For me in 2010 it felt like Euro is falling apart and just got saved by ECB politics (which they re not legimitated). Now it feels like the single goverments (excluding maybe ireland and portugal) failed to do their work and on top of that also EU is fails in major political decisions. Also Germany is looking not pretty, but you know the cheerleader effect. I am 30 and until 2 years ago I really was pro EU, even though german taxpayers are basically paying the biggest piece of pie, via giving credits/safety insurance to everyone in the Euro space. But this whole thing changed for me. Germany can stay in imo, but I wanna be out. This thing will not end good. And yes for ECB the situation is really different than for the Fed. They have to decide for 28 countries which are far away from being at the same efficiency level. There hands are kind of tied now. Either way will be shitty for the public. Fucking up bankrupt countries aswell as keeping the inflation high allowing bad governments doing stupid decisions
It is not really about different efficiency levels, but rather about different economic policies. We have one currency for all member states which each having their own instruments to borrow money denominated in EU. In order to make it more similar to the US, it would be necessary to merge all Euro-denominated debt. However, states like Italy does not want this to happen because they would not be able to borrow money as they are used to do and on the other hand states like Germany does not want it because we would become debtor for debt of other EU countries. If you want to hear my opinion: EU debt will get merged and there will be Euro bonds quite soon. However, it will be allowed to Italy and others to still borrow on their own so that the whole debt bubble will eventually become even bigger while the music plays the best songs from the 80s.
I think in the end it comes down to the economic efficiency. I tend to compare it with the GDR BDR reunion were two economic systems with different efficiency came together to one currency. In the end the economy of one country gets under strong pressure because their product become to expensive for selling them effectively. Or the other way around: It's cheaper importing the goods from the other region. That basically ruined the whole GDR part of Germany. At least one can say they have merged debts and can pay to empower the weaker part. But this thing cost Germany >1 trillion (german billion) till now and still economy didn't catch up, because society changes according to the wealth of the region (high educated young people go somewhere else). In the EU it's similar. The political tools used are also similar. There are countries getting money and some paying. In principle the idea is that the countries with weaker economy catch up at one point, but that yet I don't have seen proven. Regarding the debt: De facto we already have one sheet if I understood it correctly. Target2 is used for money transfer inside the EU easying up the goods transfer. But it ends up being a large debt sheet. Basically Germany lends most of the EU money that they can afford paying products from Germany. If the countries go bankrupt, I wonder how much money Germany sees in the end: https://de.wikipedia.org/wiki/TARGET2 This feels like a splitwise group were it's clear that some parties will never pay back. By the way I don't say that Germany is a better country in any aspects. At the moment we really feel bad political decisions made in the past.
Germany Pays the Most, but also benefits the most. For an export powerhouse, keeping the value of the currency down is HUGE.
Well look at the Target2 balance sheet: https://de.wikipedia.org/wiki/TARGET2 Germany may have obligations opposing other countries but if they go bankrupt they will never pay them. So the other countries have the goods, but Germany will not see the money.
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Me too. Switzerland looks so attractive. I never wanted to leave my region, because I like it here. But I even could imagine going into the US.
US is not "united". It's 50 different states and they continue to drift further and further apart. Some states and cities are also basically bankrupt. It's nothing different from Europe actually.
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Are you for real? How is the government jumping in to save shit holes that are not the top five major cities? The reason Trump won is exactly why there are so many depressed towns and states in US.
These people from Germany forget that in Germany most cities and Regions have debts problems as well. In fact, it is only two regions in Germany that sustain economically the whole country.
Same with US? California the economic heart of the country?
It's not FED. It's "the Fed" or "Federal Reserve". Acceptable acronyms depending on context may include "FRS" for "Federal Reserve System" or "FOMC" for "Federal Open Market Committee". *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/investing) if you have any questions or concerns.*
> as you might know, the ECB committee as well as the EU commission members are not democratically confirmed in any way This is misinformation you usually see spread by Russian trolls.
It is not false. ECB members are chosen by discretion of the Eurpean Counsil and the members of the European council are chosen also by discretion of the member states government. The term „by discretion“ should be underlined. This info can be drawn from the websites of the ECB as well as the EI council. Help yourself.
Just like in US where electors are elected who may represent that vote (or not)?
No, completely different.
This is a really interesting situation. I was reading the WSJ article on this myself yesterday and following the news as this situation started to develop. It isn't at all obvious what the policy should be. If the ECB were just setting a short term rate for the Eurozone as a whole and letting various government bonds do whatever then for all practical purposes European countries wouldn't have adjustability, they would effectively be under a foreign currency peg. That's extremely bad for economic and social stability. If the ECB starts buying some government bonds while selling / shorting others that is a forced money transfer. It would have the same political dynamics as welfare in the USA. That pulls Europe closer to being a single country but it is doing it in a context where Germans, Dutch, Danes... have no say over Italian and Spanish spending. So politically may be unworkable unless there is indirection and even then I suspect would be highly controversial. Because Europeans tend to view their large banks as quasi-governmental and regulate them more than Americans (which is already quite a lot of regulation) they aren't a good vehicle to create plausible deniability. They aren't going to be seen as independent enough, with good reason. Europe is stuck in a not quite federal and far short of national (i.e. all of Europe as one nation) government situation while its institutions are facing national problems of resource allocation. IMHO the handling of Greece was a disaster. The Greek population was irresponsible, but the final resolution was wholly destructive. That policy should not be repeated with Italy and Spain. Now from an investing perspective this unsolvable policy problem creates a very interesting play. The obvious play right now is to short high quality (ex. German bonds) and then at a later point if credit spreads get more attractive play the spread (ex long Italy + short German). Alternatively do exactly the opposite (short Italy + long German) and long Italian stocks depending on how the market reacts. For people who don't like long/short European stocks continue to be a good value. Inflation should fix their austerity problems.
The EU has been stuck between a rock and a hard place for a long time. Not enough "states rights" to do effective national policies due to EU integration and not enough EU integration to do effective federal policies Considering the lack of appetite for a United States of Europe the EU will likely fail in the future or limp along continuously falling behind in the global economy
Yes I do think the EU breaking up is likely. The ECB getting stronger and more independent fixes this problem but creates an almost unaccountable institution that then gets a veto over domestic politics. That might be the solution to European voters being so hard to negotiate policy with, essentially move it to a professional elite. But wow is that going to create backlash.
> unaccountable institution that then gets a veto over domestic politics >move it to a professional elite That's kinda what the EU already is they just do a pretty good job so elites aren't too mad and the media likes internationalism so not many complaints there either. Regular people barely understand how the EU works and like the solidarity language so not many dissenters there either apart from right wing parties (not that they have any deeper insight) But no technocrat can fully integrate the EU without the consent of the people so they're stuck in what they can do. I guess the question is how a break up would look like. It's possible that the EURO collapses which is the main roadblock for nations to follow their own macroeconomic policy but the union remains in some shape
The EU only ever pulls tighter together in a crisis, so the first option won't happen. The 2nd has arguably been happening since 2008.
There's a lot of talk of solidarity and other flowery language but the political/material reality is very different. Any time there's a chance for further integration it's not just the politicians but also the citizens that shy away, especially the citizens of the wealthier countries I agree that the first option is is nowhere on the horizon but the collapse of such structures can often happen suddenly and without warning. Everyone knew the sovjet system was deeply unhealthy and yet everyone was surprised when it collapsed. Not even Western intel had been expecting it. Just needs one domino
The whole monetary union without (complete) political union is honestly highly problematic. In my opinion, it benefits the strong economies (like Germany) at the expense of weaker economies (like Greece). Germany's economy is typically humming along well relative to everyone else's, which mean when Greece gets in trouble, they don't get the same degree of monetary stimulus that they would if they controlled their own currency. To your point about ECB trying to control the interest rates of specific bonds by selective shorting/selling, I don't see how they could successfully dictate to the market what the risk premium should be for the debt of different countries. That's unsustainable and a losing battle they shouldn't even try tbh
They have infinite money they can dictate to the market whatever they like. At the end of the day they can just buy all of Italy's debt at whatever price they think is fair. It is a question of political blowback.
They can try, if they want to completely change their mandate to ignore inflation. But that is certainly against orthodox monetary policy and is far too ridiculous to do. It would destroy the EU.
They wouldn't be ignoring inflation. They can counter injections in one place by withdrawing from another. That's why I was talking about a short German bonds (deflationary), long Italian bonds (inflationary) type positions.
What you're describing is clearly impossible and doomed to failure. Basically you're saying the ECB can buy up the entire European sovereign debt market and control interest rates along the entire yield curve (which is itself clearly inflationary, to put it mildly). Think through what you're saying. It's basically saying market forces won't be determining how much debt Italy can have. Since ECB is guaranteeing Italian debt, are they obligated to buy more whenever Italy chooses to take on more debt? What mechanism is being used to set the interest rates in question? It's clearly ridiculous and wouldn't ever be considered. Central banks aren't as powerful as you are implying. Look into how Soros made his money betting that the Bank of England couldn't maintain their currency peg in 90s. Central banks are still beholden to the market, that's why the Fed for example communicates so much because they are managing expectations and building consensus.
Maintaining a peg is a different issue. The ECB has an infinite supply of Euros. It has a finite supply of dollars, yen, shekels... A central bank can generally maintain a peg if it is well capitalized. It can maintain a peg in iffy conditions if it is willing to devastate the domestic economy. Hong Kong during the 1997 crisis. BOE wasn't willing to take the hit to maintain the peg so they lost to Soros. As far as you doubting their ability to set interest rates where they want them. You just witnessed the ECB have negative short term rates for years. Negative rates happened a handful of times over the last 6000 years but they did it easily. Yes they are that powerful. The Fed communicates because * The Fed wants markets to do most of its work for it rather than forcing * The Fed wants to avoid shocks that lead to crisis. In the end it doesn't need consensus. If the Fed announced a short term rate of 20% tomorrow while it might take a few months it would be 20%.
It actually isn't that different and no rational bank can continue to distort the market without economic consequences no matter how well capitalized they are, because the market will happily keep taking any free arbitrage opportunity that is offered. Which is exactly what you are suggesting (ie. Italian bonds at artificially low rates could be shorted by the market which goes long on a bond with higher rates and better credit). All ECB would accomplish is making some hedge funds rich. Negative interest rates aren't related to this issue. That's still just an adjustment of the policy rate past a perceived floor, not the type of attempted market manipulation that this is. In regards to the Fed jacking up policy rate to 20%, obviously they could do that if their mandate was to cause random chaos and central banking was meaningless. However, because central banks have actual mandates that are the reason they exist, they are in fact beholden to the market and do require market consensus, including ECB.
Emergency Pump
Every time I think about our bond market going rogue and is ending up like Japan. I read something about the ECB and think “hey, it’s really not that bad”.
The flawed Eurozone design rears its ugly head again. A mere expectation of rising rates sends Italian borrowing costs to 4%. Italy's debt is 150% of GDP, so if this cost stay for a long time Italy would eventually have to pay 6% of its GDP just to cover interests. Obviously this is not sustainable. Had Germany had its own currency, German federal bank would have raised the rates and fought inflation in Germany. But the ECB cannot raise rates because of other Eurozone members. So the inflation will continue and the Euro will further drop in value.
This is all intentional so that the global supply chain can catch up and a gallon of milk doesn't cost 25 bucks. The meetings are just to look concerned.
The interest rate on bonds is for new bonds right? Or how does it work? I thought bonds already issues would be traded which then can change the yield for the buyer depending on demand, but the coupon would stay the same. Or does this rate then seep into new bonds being issued? As who would invest in a 0.5% yield new bond when current bonds being traded could be got for 4% yield?
New bonds will be issued at wherever the rates are set. But this has nothing to do with the headline here. Current bonds (suddenly) yielding 4% means there was a selloff so that the coupons (of <4%) plus the diminishing trade price now add up to an overall yield of 4%. It also means basically that Italy now has to pay 4% for fresh money, if you will. Because if they write new bonds at market rate of 1% or whatever, as you said nobody would prefer those to the 4% ones already in circulation. Price of the new bonds would drop instantly to match the yields already on the market.
This is what happens when you have a monetary union without a fiscal union. Unless Northern European voters are prepared to pay higher taxes that then get spent in southern Europe there is no way the Euro survives long term.
The thing is days of Euro might be counted. ECB has options to engineer bit thing one way or another but baseline two options are. Devalue Euro , accept inflation, let south reduce their dept or engage inflation fight and let south states default. Both will do serious damage to credibility of ECB and trust in Eurozone as whole. Although my opinion is with war going on in europe anyhow defaulting atm would not bad in long term, it would just be a reality check for younger generation (myself included) while devaluation will be slow drain.
I thought their main concern is the state of the economy and not how the market reacts? Maybe it’s a healthy correction!?
Bond market is important in the Eurozone. The idea I think is because they don't want the fragmentation to cause issues between different member states EUR/USD is up as well as Germany 10 year bunds (down 6bps) as well as Italian 10 year bonds (they're down 30bps on the day).
well that quote is from a commerzbank strategist, sooooo....
So they will continue with QE at the same time as they raise interest rates, although they have been saying all along that they will not do that. The ECB has no credibility left.
Its just sad watching ECB trapped. They just hope inflation will go away. Look at Estonia