1011 GMT April 05, 2020
A day after Lagarde sent Italian bonds into a tailspin and stirred memories of turmoil by saying the ECB’s job isn’t to rein in yields, her colleagues went on the counterattack. Italian Governing Council member Ignazio Visco told Bloomberg Television that officials can skew purchases toward the worst-hit countries — such as his.
“We can frontload, we can concentrate on particular jurisdictions according to the circumstances,” Visco said in the interview. “There is no question that if there are movements in the spreads caused by fears about the effects of coronavirus, this will make more difficult our provision of liquidity and the impetus we are giving to the economy.”
Italian bonds erased losses after Bloomberg’s interview with Visco on the prospect of the ECB front loading purchases of Italian debt. The rate on 10-year bonds fell 18 basis points to 1.58% as of 11:41 a.m. in London, after earlier rising as much as 19 basis points.
”Lagarde wasn’t so clear about a possible ECB purchase of bonds, so the ECB is trying hard now to convince market that it stands ready,” said Joost Beaumont, senior fixed-income strategist at ABN Amro. “Visco’s remarks go in this direction and his clarification seems to be working.”
Surging bond spreads — the difference between yields on debt of stressed nations and safer options such as Germany — were a hallmark of the euro zone’s 2012 debt crisis that almost broke up the currency bloc.
The ECB’s view is that the market misinterpreted Lagarde’s comments, and that if spreads are driven by liquidity needs or a flight to safety, that’s absolutely the central bank’s job. Despite 2.6 trillion euros ($2.9 trillion) of asset purchases so far and hundreds of billions more to come, it doesn’t see any imminent risk of breaching European Union law banning it from financing governments.
“We will not tolerate any risks to the smooth transmission of our monetary policy in all jurisdictions,” ECB Chief Economist Philip Lane wrote in a blogpost. “We clearly stand ready to do more and adjust all of our instruments, if needed to ensure that the elevated spreads that we see in response to the acceleration of the spreading of the coronavirus do not undermine transmission.”
“Lagarde didn’t offer the broad-spectrum stimulus that financial markets may have wanted, but she’s taken appropriate action to deal with the shock at hand. Her comments on spreads were ill-judged and have required a lot of subsequent clarification, but markets should take her advice — don’t “overinterpret” her.”
Lane added that officials will cut interest rates if needed. Bank of France Governor Francois Villeroy de Galhau declared earlier that the ECB will use all the flexibility it has to combat fragmentation in the euro area if necessary.
“We will use our full firepower, with maximum agility and all possible flexibility,” Villeroy told France’s Radio Classique. We can “buy more of certain country debt and less of others.”
Policy makers unexpectedly opted not to cut rates, instead pledging to spend an extra 120 billion euros on quantitative easing by the end of the year. The ECB will also start a new program to make it easier for banks to support smaller companies hit by cashflow disruptions.
In rare swipes at the central bank, French President Emmanuel Macron and Italian Prime Minister Giuseppe Conte both rebuked the decision. Macron said he didn’t think it’ll be enough, and Conte said the task of the ECB is “not hindering but facilitating.”
The ECB was so keen to roll back Lagarde’s remarks, that it even included a rare addendum in its official transcript of its press conference, referring to comments she made afterward in an interview with CNBC.
Spanish Governing Council member Pablo Hernandez de Cos said in an interview in Madrid that Lagarde was misinterpreted and is the best person to spearhead the crisis. “What do we need to focus on? On the clarification she gave afterward,” he said.
Still, the ECB has repeatedly said that it can’t combat the virus impact alone, and governments need to do more. The mood may be shifting — Germany pledged to spend whatever is needed to dull the economic impact of the coronavirus, while the European Commission said it’s ready to give a green light to widespread fiscal stimulus if the situation deteriorates.
German Finance Minister Olaf Scholz said that his country would spend billions of euros to cushion the economy, and called the situation “very serious.”