Home Business BTP-Bund spreads close to the danger threshold, in the Day After ECB markets are clamoring for Whatever It Takes Draghi style

BTP-Bund spreads close to the danger threshold, in the Day After ECB markets are clamoring for Whatever It Takes Draghi style

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BTP-Bund spreads close to the danger threshold, in the Day After ECB markets are clamoring for Whatever It Takes Draghi style

Spread BTP-Bund close to the danger threshold that could lead the ECB to review its position and maybe launch that whatever it takes that the European markets are clamoring for. The danger threshold was identified by economists at 250 basis points. In discounting the anti-spread bazooka not received, the differential between the yields of Italian government bonds and those of German 10-year Bunds has soared up to 226 basis points, not far from the alert threshold of 250 basis points. Is the achievement of this symbolic target necessary to induce the European central bank to act?

With the ECB remaining with its hands on the risk of an encore of the euro area sovereign debt crisis, we’re back to talking about Piigs. This is the acronym, sadly known, which indicates the countries that ended up in the crosshairs of short speculations of investors in the period preceding the whatever it Takes di Draghi del 2012, i.e. Portugal, Italy, Ireland, Greece, Spain.

These same countries came under attack on the day of the shock signed by the ECB, which saw the hawks triumph, with the announcement of the end of the traditional QE APP, of an imminent rate hike of 25 points at the next meeting on July 21, of a perhaps more aggressive monetary tightening in September, followed by other rate hikes.

All this, without Lagarde having announced that anti-spread shield, or any bazooka that could lock the Eurozone, on which the markets had bet in recent days, also thanks to some indiscretions.

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ECB, markets are clamoring for Whatever It Takes Draghi style

In the aftermath of the ECB trauma, the markets show no signs of easing: the spread still travels above 220 points, just as BTP rates fluctuate above the 3.6% threshold.

At Piazza Affari, things are not going well at all, with the Ftse Mib index which marks a drop of approximately -4%.

The assurances of the ECB representative Villeroy fail to appease the sales. The markets want deeds, not words, and are demanding that Lagarde launch some sort of Whatever It Takes in stile Draghi.

Investors also dump Greek bonds: the hemorrhage thus triggers Greek 10-year rates by as much as 29 basis points, to 4.41%, to the record since January 2019.

The ECB showed such a hawkish face in its desperate fight against inflation to the point that economist Mohamed El-Erian pointed out that the New Normal could be represented by increasingly frequent squeezes of 50 basis points, writing on Twitter that the 50 could be the new 25.

The strong doubts expressed by Olivier Blanchard, former chief economist of the International Monetary Fund:

Does Christine Lagarde & Co have at least one bazooka available to activate to avoid the worst, in order to avoid the risk of financial fragmentation in the euro area? Or is his commitment only in words?

The biggest concern, for Blanchard, is that the ECB ends up being forced to convince investors on the fact that it will do everything possible, launching a whatever it Takes. And that until investors are reassured enough, the risk premium gets higher and higher, further contributing to the flare-up of rates and spread.

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Meanwhile Citigroup strategists including Jamie Searle, in a note to clients: They point out that “It doesn’t make much sense for the ECB to aggressively raise rates, provoke fragmentation (of the euro area) and then introduce a new tool to counter it. It is much more likely that the cycle of rate hikes is put out of action by the initial monetary squeeze of the ECB, which will be accompanied by the widening of the spread (BTP-Bund). And the reference is precisely to BTPs, therefore to Italy risk.

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