EXCLUSIVE: Spain DMO Head: ‘No one disputes that the Eurosystem needs to hike interest rates’

1 July 2022

EXCLUSIVE: Spain DMO Head: ‘No one disputes that the Eurosystem needs to hike interest rates’
- Spain DMO head: Debt sustainability not currently a problem in any Eurozone country
- Spain DMO head: Spreads ‘have to be justified by fundamentals’
- Spain DMO head: Anti-fragmentation tool will help ECB tighten policy faster, more credibly 

By David Barwick – FRANKFURT (Econostream) – It is well understood by everyone, including euro area sovereigns, that inflation requires that the European Central Bank increase official borrowing costs, according to Pablo de Ramón-Laca Clausen, General Director of the Tesoro and Financial Policy, Spain’s sovereign debt issuer.

In an interview with Econostream this week (see transcript here), de Ramón-Laca said that his and other European debt management offices had all prepared for the inevitable normalisation of monetary policy, and that debt sustainability was not currently a pronounced concern in any Eurozone member country.

It was ‘wise’ on the part of the ECB to respond to the recent increase in sovereign spreads by developing the appropriate instrument and thus ensuring that monetary policy normalisation is not hindered by an adverse market reaction, he said.

‘No one disputes that the Eurosystem needs to hike interest rates’, he said. ‘We’ve had eight years of very low, even negative interest rates because of the fear of deflation. … So, accommodative policy was warranted. But now that inflation is in excess of 8%, interest rates need to rise.’

‘And we’ve all been preparing for this – the Spanish Treasury, the Italian Treasury, the French Treasury, the German Treasury, and so on’, he continued. ‘We’ve all been preparing for the normalisation that was bound to come. We all expected it.’

The single monetary policy of the euro area is susceptible to fractures, however, that are not consistent with the imperative of making sure ‘that interest rates rise roughly as much in Germany as they do in Italy’, he said.

Differences in yields between member states must reflect fundamentals, he said.

Given possibly excessive recent market developments, he said, ‘the ECB does well to use its toolkit to make sure that monetary policy doesn’t break as interest rates are increased for the first time in many years.’

‘And I think the anti-fragmentation tool will help the Eurosystem tighten monetary policy more credibly, more quickly and therefore more effectively’, he added. ‘So, this is something that has to be done.’

De Ramón-Laca declined to agree that it had to be done more for the sake of Italy than of Spain, arguing that debt sustainability concerns were not currently warranted anywhere in the euro area.

The overarching problem was the divergence in growth across the region, he said, but the Next Generation EU recovery fund should ‘contribute enormously to putting us all on the same wavelength, because we’re all investing a large amount of our GDP at the same time.’

Moreover, he observed, debt management offices in the area had done their homework in recent years and thus faced significantly reduced refinancing risk.

‘Right now in Spain, in terms of the interest burden as a proportion of GDP and as a proportion of public revenue, the current debt stock of 117% of GDP – soon to become 115% - is as burdensome for Spain as the 35% that we had in 2005’, he said. ‘Such is the effect of the eight years of ultra-low interest rates on our portfolio.’

Growth could become a worry, he conceded, but this was an argument for the ECB to act, rather than allowing inflation to corrode consumption, investment and confidence.

The ECB, he said, was in a good position to devise an effective anti-fragmentation tool. Although the legal precedents related to OMTs would probably have to be respected, the Eurosystem had at its disposal a vast quantity of sovereign debt that could ‘be used to stop undue speculation about spreads’, he said.

‘The anti-fragmentation tool was talked about months ago, but there didn’t seem to be universal agreement that it would become necessary’, he said. ‘Having seen the reaction in the past few weeks, it turns out now that monetary policy could risk being impaired if the necessary tightening happens quickly. And so it’s only wise that they are considering this and designing a contingent tool to ensure that this doesn’t happen.’

De Ramón-Laca took a relaxed view of recent talk about the possibility that the ECB would go even beyond the hike sizes of 25 and 50 basis points pencilled in for July and September, respectively.

‘I think they have to do whatever it takes to contain inflation expectations’, he said. ‘If whatever it takes involves big movements in interest rates, I’m no one to comment. They have the competence and autonomy and one mission. The anti-fragmentation tool enables them to do credibly whatever it takes.’