Sunday, August 7, 2022

How Christine Lagarde took over the bond market from a London cellar

It was sitting alone in the basement of a London hotel that Christine Lagarde healed the eurozone’s worst debt turmoil since the pandemic.

Growing up outside a mini-heatwave, and armed with seemingly only a coffee pot and his customary iPad, the president of the European Central Bank called on the Governing Council colleagues during an emergency video call on 15 June to get into action. Took only two and a half hours for this. ,

His response – a two-pronged pledge to counter market speculation – was enough to quell a nascent Italian bond crisis without an extra euro that had yet to be spent.

A decade after his predecessor Mario Draghi, also in London, faced much debt turmoil, Lagarde’s actions decided to underline a change in the ECB’s philosophy on the markets, which will be held this week at its annual retreat in Portuguese. can be postponed. Sintra’s support.

In particular, as the officials speaking for this story claim, it shows a bias towards confronting turmoil, enabling calmer decision-making – the creation of an emergency to the ECB in March 2020. In contrast to the panic after a wrong move by Lagarde before. Bond-buying measures.

It is an account of the events that brought him to that critical moment, which was reported by several people familiar with the matter, who spoke on condition of anonymity.

It begins in Amsterdam on Wednesday, 8 June at the first Governing Council decision meeting outside Frankfurt since 2019.

Despite months of contemplation of threats, and warnings by Bank of Italy governor Ignazio Visco nine days ago, officials were upbeat about the potential for tension in the debt markets of weaker euro members as they formalized plans to raise interest rates. was given form.

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The biggest emphasis in their two-day meeting was on the pace of tightening.

Speculation of a tool to relieve debt tensions had already been created, resulting in disappointment when Lagarde did not disclose one, but even so, the unfavorable market reaction has yet to cause alarm.

Within 24 hours, officials saw a change in the picture as US inflation hit a 40-year high, prompting speculation about a rate hike by the Federal Reserve.

As global markets were hit by a storm, the Italian yield extended its jump, climbing above 4pc for the first time since 2014. As Lagarde discussed Italian bonds with colleagues on the executive board, chief economists Philippe Lane and Isabel Schnabel and senior staff were asked to join. , she began to wonder whether doing nothing was still an option.

Arguing that market tensions could escalate, Lagarde reassured his board that it was time to revisit the ECB’s crisis book and convene an ad-hoc meeting, even if it meant pre-empting the Fed’s scheduled decision. Have to vacate

Invitations were issued for the video call the next day.

On Wednesday, June 15, what appeared to be leaks in Italy raised expectations Corriere della Sera There will be a newspaper announcing an emergency meeting.

When the video call started at 10 a.m. London time, it appeared that Lagarde was discussing from an empty room. Officials chose to act on the grounds that past lessons show that lingering problems can become overwhelming very quickly.

They agreed as a first defense to tilt the reinvestment of mature bonds purchased under their pandemic program toward struggling countries and to accelerate work on a new crisis tool.

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Neither decision actually involved any immediate debt purchases, and it remains to be seen whether such purchases will be required.

In fact, officials are still hopeful that the ECB may devise a measure that investors will deem powerful enough to stop speculation.

The ECB is now awaiting advice from staff, including defining when action will be needed, what conditions governments must meet, and ways to neutralize the impact of renewed bond purchases on balance sheets – ideally. for their July 21 decision.

With the ECB’s decision published in a statement, Dutch governor Klaas Nott called the conference back in Milan “to rest easy, we are ready”.

Meanwhile, Italian 10-year bond yields have remained at less than 4 percent since then.

The unrest could still erupt again, but for now the June 15 action is one of the ECB’s most effective use of words under Lagarde’s leadership.

And instead of Draghi’s more glaring announced circumstances to “do whatever it takes” to protect the euro, it quickly stopped the crisis.

This does not mean that the ECB has escaped criticism.

Last Monday, Lagarde was accused of bias as he found himself in another capital, Brussels.

“Do you think your Governing Council is making decisions or just announcing them behind the markets?” Jonas Fernández, a European Parliament MP from Spain, asked him, noting: “I think the ECB is acting behind the markets.”

As Lagarde disagreed, he insisted that officials be nimble about tensions.

“You have to nip it in the bud, you don’t want to risk fragmentation,” she said.

“You want to pre-empt it, and you want to prevent it.”

Nation World News Desk
Nation World News Desk
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