Exclusive: ECB Insider: When You Develop an Anti-Fragmentation Tool, It Means You’re Afraid
15 June 2022
- ECB insider: Would be good to have an anti-fragmentation tool, but there are also risks to this
- ECB insider: Issues of communication make us ‘not that much inclined to work on that instrument’
- ECB insider: PEPP framework can always be renamed and employed as an anti-fragmentation tool
By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s reluctance to be more proactive about coming up with a distinct anti-fragmentation instrument is due at least in part to concerns that the endeavour itself will signal to financial markets a certain fear policymakers would prefer not to reveal, Econostream understands.
The communication at last Thursday’s press conference by ECB President Lagarde, who was queried on the subject but confined herself to reassuring as to the ECB’s ability to deal with fragmentation if need be, was ‘good’, an ECB insider said.
‘It was predictable, but it expresses the view of the ECB’, he added.
Referring to the ECB’s pandemic emergency purchase programme (PEPP), the flexible reinvestment of whose maturing securities is seen as one way of countering fragmentation, this person observed that ‘the framework of PEPP might be easily employed, it can be simply renamed and employed for any other reason as a second anti-fragmentation tool.’
The experience of PEPP also showed that the ECB can react quickly, he pointed out, an argument the ECB has been fond of relying on.
‘And second, it would be good to have in the portfolio a certain anti-fragmentation tool, but there are also risks’, he continued. ‘When you develop such a tool, in a way you are afraid. There are communicational things, as far as I understand, which is why we are not that much inclined to work on that instrument.’
Another problem is ‘the very basic question of what fragmentation is’ and whether what is seen as such is indeed ‘fragmentation or explained by economic factors’, he said.
‘Definitely we need to avoid fragmentation’, he said. ‘But it’s because you need an effective monetary policy transmission. But the differences in spreads, yields – they may occur because of many reasons. Because your fiscal policy has huge deficits and growing debt. So, would this mean fragmentation? Or would this mean poor policy? It’s a tougher question than it might seem on the surface.’
The verbal intervention by Executive Board member Isabel Schnabel on Tuesday evening suggested an ECB increasingly concerned about market conditions as rates lift-off looms. That the Governing Council is holding an ad hoc meeting today could indicate that the ECB is getting ready to confront the fears that have so far held it back.