ECB Needs to Maintain Its Firepower to Close Bond Spreads
The central bank should reconsider plans to shrink its balance sheet given the risk of turbulent debt markets.
Christine Lagarde may need to keep her powder dry.
Photograph: ECB
The European Central Bank hosted its annual pow-wow this week in the bucolic hills of Sintra, Portugal. There was the usual round of panels with other central bank heads and earnest discussions of economic papers. But instead of debating academic issues, policymakers might have been better off focusing on more immediate issues — such as the recent surge in French yield spreads and the potential for wider bond market contagion.
The 10-year yield premium of French debt to the German benchmark soared to as high as 82 basis points, from a steady level below 50 basis points before the June European Parliament elections. A win for either the hard-left or hard-right at the second round of the French parliamentary elections on Sunday could cause further fixed income ructions. The timing of the plebiscite is bad news for the ECB, which is scheduled to start running down the debt pile accumulated by its pandemic bond-buying program this month. Given the scope for market dislocation, it may want to delay that move.
