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| Photo Credit: AP. |
The European Central Bank on Wednesday vowed to create some market backstop that could protect member countries against financial turmoil that was witnessed more than a decade ago during a debt crisis, AP reports.
The bank’s governing council called an unscheduled meeting to address worrisome market fluctuations
following the bank’s decision to hike rates in July and September for the first time in 11 years. The moved is the result of a government bond selloff, record inflation of 8.1% in the 19 European Union countries using the euro currency. Over the years, ECB bond purchases and record low interest rates have kept borrowing costs low for businesses and governments.According to AP, last week the bank announced it will raise
rates to halt rising prices but did not offer a specific measure to deal with
market turbulence caused by suddenly higher borrowing costs for more indebted EU
countries such as Italy and Spain.
The problem is much more pronounced because of the single
currency, one central bank policy operational in the eurozone.
The ECB said it would speed development of “a new
anti-fragmentation instrument” that could be reviewed for approval by the
governing council. Its statement didn’t say what that instrument would be, AP
reported.
The bank plans to use money it gets from maturing bonds it
holds to make new purchases and to fight excessive borrowing costs if
individual countries face market pressure.
According to AP, the ECB already has an emergency
bond-market backstop that could allow it to step in and buy the debt of a
troubled country. The measure dealt extensively with the 2010-2012 debt crisis
after the bank announced it as part of then-President Mario Draghi’s promise to
do “whatever it takes” to keep the eurozone from breaking up.
A top ECB official, Isabel Schnabel, tried to calm market
concerns Tuesday, saying the bank “will not tolerate” unjustified market rate
increases.
“Our commitment to the euro is our anti-fragmentation tool,”
she said in a speech at Paris’ Sorbonne University, according to AP. “This
commitment has no limits. And our track record of stepping in when needed backs
up this commitment.”
Italy has experienced rising interest yields on its 10-year
government bonds that have risen from 1.2% at the start of the year to 4.1% on
Wednesday.