As the ECB prepares to increase interest rates to fight inflation, investors are worried whether southern eurozone countries can cope with the withdrawal of easy money.
Has Christine Lagarde, the head of the European Central Bank, got what it takes to stare down a looming eurozone debt crisis?
Taken together, the two decisions mark the end of an era, which saw the central bank cut interest rates into negative territory, and embark on a massive bond-buying program, which saw it buy trillions of euros of government debt in an effort to spur growth and combat deflation.
The yield on Italian 10-year bonds has jumped to 4.01 per cent, a sharp increase from 0.75 per cent a year ago. Meanwhile, Spanish 10-year bonds now trade at a yield of 2.98 per cent , while 10-year Portuguese bonds yield 2.99 per cent .The gap between Italian and ultra-safe German 10-year bonds – which is seen as a gauge of eurozone stress – has blown out to 2.4 percentage points, more than double the level of a year ago.
Lagarde is acutely aware of the problem. She’s promised that the ECB will take action to avoid “fragmentation” of its monetary policy – her shorthand way of saying the central bank will jump back into the market and buy the bonds of southern eurozone countries to stop yields from rising too sharply.
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