- European Central Bank should increase its debt purchases to cope with rising borrowing costs.
- Stournaras stated that the high debt interest rate is affected by unexpected factors, and the European Central Bank should speed up the purchase of debt to ensure market stability and help the economy recover after the epidemic.
- “In my view, there’s fundamental justification for a tightening of nominal bond yields in the long end,” the Greek central bank governor said.
News sources reported that Yannis Stournaras, a member of the European Central Bank Management Committee and Governor of the Central Bank of Greece, said that the European Central Bank should increase its debt purchases to cope with rising borrowing costs.
The Eurozone bond yield rose to a three-year high. The European Central Bank was under pressure and the outside world called for action to ensure that interest rates remain low in order to revitalize the local economy. Stournaras became the first European Central Bank member to demand increased debt purchases in order to control the yield.
“In my view, there is an unwarranted tightening of bond yields, so it would perhaps be desirable for the ECB to accelerate the pace of PEPP purchases to ensure favorable financing conditions during the pandemic,” Stournaras said in an interview. “In my view, there’s fundamental justification for a tightening of nominal bond yields in the long end,” the Greek central bank governor said.
Two other ECB executive members, including Philip Lane and Isabel Schnabel, said earlier that they must ensure that bond yields are maintained at an appropriate level, but they did not explicitly say that they need to increase bond purchases.
Stournaras stated that the high debt interest rate is affected by unexpected factors, and the European Central Bank should speed up the purchase of debt to ensure market stability and help the economy recover after the epidemic.
He believes that the European Central Bank should make a decision to increase its efforts to buy bonds at the interest rate meeting on the 11th of next month, saying that there is still room for 1 trillion euros in the bond purchase plan. It is believed that there is no need to make specific policy revisions.
Bond yields are currently falling across the globe. The lowered rates are allowing companies to borrow more, which, in turn, is helping to lift the economy out of its slump. However, bond buying is a temporary cure-all for the problems in the credit markets, and investors are waiting for the ECB to give the go-ahead to begin increasing rates again. With a tight job market, coupled with falling consumer spending, it may be a while before we see a return to normal.
In its own way, the ECB is acting to help the credit markets. By raising rates, it hopes to raise inflationary pressures and get markets back on track to grow. However, this raises the cost of borrowing for both governments and businesses, and so, in the long run, the effects aren’t always positive.
Bond purchases are not the only method of raising money for the government. Interest rates can also rise, and that is already having an effect on the bond markets. That’s because issuing more debt only makes it harder to make the repayments. It’s also likely to put a lot of downward pressure on the already high-interest rates of commercial loans, which is having an even more adverse impact on household budgets.
If bond prices start falling, then investors will move their money to those safer European currencies, such as the Swiss Franc or the Euro. If bond prices rise, then investors will worry about losing their invested money, and that will probably cause them to pull out of the bond markets altogether.
Regardless, this latest move should be a major concern for all bond investors. Bond prices have been dropping for quite some time now. The fact that the ECB is pumping so much money into the market could mean we may see more of this for the foreseeable future. While this is a concern for most people, it is good to know that the ECB is aware of the risks involved in bond buying and is considering ways to mitigate them. Whether or not this plan works remains to be seen – but one thing is for sure: European bond buying is likely to continue.