The ECB could raise interest rates by as much as 50bps. Problems, but not for the public debt ..
According to Reuters European Central Bank policy makers are considering raising interest rates by 50 basis points, 0.5%, more than expected during Thursday's meeting in order to tame inflation from records, two sources with direct knowledge of the discussion told Reuters.
To cushion the impact of rising borrowing costs, policymakers should also announce a deal to help more indebted countries like Italy, Greece, Portugal and Spain on the bond market. According to the sources, the agreement will require compliance with the European Commission's rules on reforms and budgetary discipline, and this would constitute a huge problem in the application of the instrument, because the same, if subject to conditionality, will not enjoy the security required by the market. If Draghi knows the job of the central banker, he should immediately intervene and stop the distortion: it is better to jump immediately than to notice it later, but it seems that now everything is going along a path that has nothing to do with logic and the economy. Then the ECB would cease to be autonomous and this, in my humble opinion, would be enough to get out of the Euro, because all the premises of the last forty years of central bank impartiality would be canceled. At this point it would be better to go back to the pre-1981 situation than to one in which others decide how and where
However, the increase in interest twice as stated will lead to a big problem. If the ECB instrument were to be effective, and we doubt it, this does not cover two categories of securities and issues:
- corporate securities in euro;
- government bonds from non-EU countries;
These titles will suffer:
- a very sharp blow in the prices of the securities already issued;
- a substantial increase in refinancing costs.
Do you want two examples of countries that have financed themselves by issuing bonds in Euros? Argentina, which is not only a debtor in dollars, and Mexico, which even issued a centennial in euro which will now suffer a big blow. For these countries, refinancing on maturity (okay not the centennial, which will be the problem of another era) will be a lot more problematic. But how will the heats of northern Europe keep the mortgage boom that feeds the real estate market with the issue of bonds? We'll find out in a couple of months.
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The article The ECB could raise interest rates by as much as 50bps. Problems, but not for the public debt .. comes from ScenariEconomici.it .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/la-bce-potrebbe-aumentare-i-tassi-di-interesse-di-ben-50pb-problemi-ma-non-per-il-debito-pubblico/ on Tue, 19 Jul 2022 17:09:59 +0000.