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The European Central Bank took action Thursday, but appeared to leave investors disappointed. And one remark by ECB President Christine Lagarde left some observers stunned until she appeared to walk it back.
Asked at her news conference following the Governing Council meeting about potential upward pressure on yields if governments follow through on calls to provide more fiscal stimulus, Lagarde said: ”We are not here to close spreads, this is not the function or the mission of the ECB. There are other tools for that and there are other actors to actually deal with those issues.”
Lagarde appeared to temper the remark in a subsequent interview with CNBC, saying that she was “fully committed to avoid any fragmentation in a difficult moment for the euro area.”
ECB watchers had certainly reacted to her initial remark with surprise. After all, the famous 2012 pledge by her predecessor, Mario Draghi, to do “whatever it takes” to preserve the euro came in response to soaring Italian government bond yields, which had soared to levels viewed as unsustainable versus German government bond yields, which serve as the eurozone’s risk-free benchmark.
Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, called the initial remark “astonishing,” particularly with Italian bond yields soaring in the wake of a countrywide lockdown to fight the spread of COVID-19. He and others said the remark amplified the Italian bond selloff, with the premium demanded by investors to hold Italy’s 10-year bond TMBMKIT-10Y, +49.34% over Germany’s 10-year bund TMBMKDE-10Y, -0.31% soared to a nine-month high.
Frederik Ducrozet, economist at Pictet Wealth Management, on Twitter said the remark was “backfiring big time” and called it the “opposite of whatever it takes.”
Lagarde’s later remarks appeared to soothe the bond market somewhat, though the spread remained sharply wider on the day, expanding by around 58 basis points, or 0.58 percentage point, to nearly 250 basis points.
That remark aside, economists had given the ECB’s Thursday decision, which saw policy makers decide against cutting rates but temporarily expand its bond-buying program and roll out cheap loans to banks, mixed reviews, while investors appeared to find it underwhelming.
Lagarde said the measures would help cushion the effects of the spread of the coronavirus, which she described as a “major shock” to global and eurozone growth prospects.
Economists said the ECB’s decision to hold off on a rate cut, given that its deposit rate already stands at -0.5%, was understandable, though Lagarde did leave open the possibility of lowering rates further if needed.
“This is a package aimed at supporting the banks and preventing the sort of credit crunch that we saw in 2008. In fact, it is highly questionable whether any big bazooka would help, at least not right now,” said Carsten Brzeski, chief eurozone and global economist at ING, in a note.
“The only thing which could really stop fear, uncertainty and turmoil would be a vaccine and certainly not monetary policy easing,” he wrote.
The measures did nothing to shield European stocks from a historic global equity rout that in the U.S. saw the S&P 500 SPX, -4.58% plunge more than 7% and the Dow Jones Industrial Average DJIA, -4.67% lose over 2,000 points. The pan-European Stoxx 600 Europe Index SXXP, -11.48% plunged 11.3%. The euro EURUSD, -1.0026% tumbled, sliding 1.5% to $1.11 versus the dollar.
