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The reduction of the ECB balance will be the ‘litmus test’ of European debt

Date: June 5, 2023 Time: 15:29:24

Europe moves through unknown territory this 2023 The small print of this restrictive monetary policy also includes a reduction of the balance by 15,000 million euros per month starting next March.

The central bank’s intention is to reduce its participation in the debt auctions of European countries, something it will do by ceasing to reinvest maturities in new bonds. This roadmap was already contemplated from Frankfurt in 2019, however, the pandemic ruined its plans and the central bank was forced to relaunch debt purchases instead of moderating it.

With a completely different scenario from then, the body led by Christine Lagarde seems willing to show off its ‘hawkish’ tone, a decision not without risk for the most indebted countries in Europe. From Bank of America they pointed out this decision as one of the main threats to the Eurozone for this year, given the “high” need for financing of some economies due to higher spending due to inflation and the energy crisis.

The measure comes after a vertical rise in interest rates in an unprecedented period of time, which could add pressure to certain regions, where the scars of the debt crisis are still present. Although the chief economist for Europe of the US firm, Rubén Segura-Cayuela, rules out a scenario like that of a decade ago and does not contemplate “any scares” in risk premiums, he does warn that they are going to rise.

At the present time, the differential of the Spanish debt against the German ‘bund’ is 94 points, a level that has not been seen since the end of April 2022, in line with the Italian, which relaxes slightly again after closing the exercise above 200 points. The one from Greece, for its part, is at 196 points and leads the classification. The greater demand for profitability on the part of the private investor once the ECB goes into the background, targets the peripheral states, which are precisely the most indebted.

The central bank has played a very active role as a buyer of sovereign bonds in recent years. The monetary stimuli of the pandemic have led it to double its balance, which reaches 8.8 million euros. Now his step aside in the markets for the purpose of purchases last July is consolidated with the purpose of reducing the portfolio.

ING analysts warn that without the help of the ECB, high deficits do not help states, but instead will translate into a “dramatic” increase in the cost of meeting their liquidity needs. “An excessive amount of debt purchases in previous years numbed the sovereign bond markets due to the supply effect,” they point out from ING. The key now lies in what is the minimum return that investors are willing to accept after the withdrawal of the ECB.

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.

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