The 25 eurozone rate-setters meeting in Amsterdam last month thought they had plenty of time to finalise the European Central Bank’s plan for avoiding a bond market crisis when they started to raise rates. They were wrong.
A surge in borrowing costs for weaker southern European countries, in particular Italy, led to a divergence in yields with northern member states — a phenomenon central bankers describe as “fragmentation”. At an emergency meeting, the ECB decided to “accelerate the completion of the design of a new anti-fragmentation instrument” to counter any unwarranted sell-off in a country’s bonds.
“If the fragmentation in bond markets is unwarranted then we should be as unlimited as possible,” Pierre Wunsch, head of Belgium’s central bank and ECB governing council member, told the Financial Times. “The case to act is strong when faced with unwarranted fragmentation.”