SANISHA PACKIRISAMY: The ECB’s newest tightrope

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If you think matters of governance are not a threat to central banks outside SA, consider the case of the European Central Bank.

A euro sign on the European Central Bank's headquarters in Frankfurt, Germany, December 30 2021. Picture: WOLFGANG RATTAY/REUTERS

The additional compensation investors demand for holding bonds in riskier countries should reflect structural differences between countries. However, sometimes capital markets overreact in a bout of fear, leading to higher risk premiums than are warranted and a wider spread of prices against the benchmark. This can lead to liquidity drying up and can prevent bond prices from reflecting economic realities about the repayment capacity of countries with high debt.

How things have changed. The ECB’s latest move has signalled that the bank will not hesitate to douse the flames of inflation In practice, the TPI allows the ECB to shore up a country’s bonds if there are large interest rate swings that are not justified by its macroeconomic fundamentals.utright monetary transactions” programme under which it bought bonds issued by eurozone countries, provided they met certain conditions. Don’t have severe macro imbalances;For a country such as Italy, which has just lost its prime minister, these are demanding requirements.

 

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