The rise in Italian interest rates explains this extraordinary monetary policy committee. At over 4%, the 10-year Italian debt interest rate had reached its highest level since 2014. The returns required by investors to finance the most indebted European countries, such as Greece, Portugal, Spain, France and Belgium, were also on the rise since the announcement of the end of public debt purchases by the ECB.
With a growing divergence of interest rates between the countries sharing the single currency and the rise in interest rates, everything was in place for a new debt crisis in the eurozone. It is to avoid this catastrophic scenario that the big European funders have decided to act.
From now on, the ECB will apply a certain degree of flexibility in the reinvestment of securities it holds that are about to mature. In concrete terms, when Germany, for example, repays the money from a bond that has come to an end, the ECB will now be able to buy any country's debt with that money, even though it was once again investing in German debt. This will enable targeted intervention in financial markets without increasing the total amount of financial assets the ECB holds.
In addition, a new instrument to regulate the significant divergence of interest rates in the euro area is expected to emerge.
These decisions have somewhat relieved investors. Italian interest rates have fallen. The euro and European stock markets have also picked up. However, we must not rejoice too quickly. The next few quarters are going to be tough. Eurozone economies have weathered the COVID crisis, and the war in Ukraine has reduced the potential for long-term growth.
As a result, we no longer buy Eurozone equities as part of a diversified portfolio (chart below).
