Friday, August 12

The ECB will transfer money from the north to the south of Europe to contain the rise in interest rates


The European Central Bank (ECB) will classify the countries of the eurozone as donors (Germany, the Netherlands and France), neutral and recipients (Spain, Italy, Portugal and Greece) as the starting point of the new era without programs of purchase of bonds, which officially ends this Thursday, after having guaranteed the demand for the region’s public debt for years, even in the worst moments of the pandemic.

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According to this scheme, that has advanced exclusively Reuters, starting this Friday, July 1, will buy debt from “these recipients” with the income from the maturities of the bonds of “the donors” that it has been acquiring since 2015, to prevent the financing conditions of the first. That is, to prevent risk premiums from rising —the difference between the interest required on the reference bond of Spain, Italy or Portugal and that of Germany, which is considered the best paying and most fiscally disciplined partner—.

In this way, it will transfer the money it has created in this time from north to south —of course, it will also buy debt from the latter with the maturities of its own bonds—, and it will fulfill its objective of tightening financing conditions across the board for stop fueling runaway inflation without harming Spain, Italy, Portugal and Greece, the countries most over-indebted and hardest hit by the COVID crisis. It would be the anti-fragmentation tool that the ECB itself had advanced in recent weeks, and that has relaxed the risk premium in recent years, from 140 basis points on June 14 to close to 100.

This same month of July, it will begin to raise official interest rates from the 0% at which it has maintained them to favor economic recovery. First, and as it has already announced, it will increase the reference rates, according to which banks set the cost of loans or mortgages, by 25 basic points. And, in September, it is expected to increase them another 50 integers.

The ECB’s challenge is enormous: trying to cool down the granting of credit without slowing down economic activity and causing a recession, at a time when the Russian invasion of Ukraine has already slowed down the recovery due to its impact on international energy markets and other raw Materials.

Do rate hikes serve to contain inflation?

Some critical economists question the institution’s decisions. “It does not make any sense. How does a rate hike solve the geopolitical problem of the Ukrainian conflict? How do you get oil to drop?” argues economist Stuart Medina Miltimore.

“Even if the ECB raises interest rates, inflation will remain high. The ECB can act on demand, but not on supply (in this case of raw materials, minerals, oil or gas). As long as there are sanctions there will be inflation”, agrees Víctor Alvargonzález, director of strategy and founding partner of the independent advisory firm Nextep Finance.

In practice, a rise in rates does have direct and palpable effects, such as banks earning more money from mortgages and loans and families and the State suffering an increase in these financial expenses.

“It is necessary to closely monitor this market, on which the armed conflict could have conflicting effects, given the real erosion of agents’ income that represents the increase in inflation and the possible tightening of financial conditions,” assured the minister. Governor of the Bank of Spain, Pablo Hernández De Cos in Congress. And he clarified: “In any case, in the face of moderate increases in interest rates, it would be expected that this effect would not be very significant, in part due to the increase in the weight of fixed-rate mortgages observed in recent years, which in December of 2021 stood at 24.9% of the outstanding balance”.



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