Limiting bond stress serves ‘all’ eurozone: ECB

Keeping borrowing costs under control for more indebted members of the eurozone is also in the interest of the “least vulnerable” countries, like Germany, ECB board member Fabio Panetta said Friday.

The prospect of a long-awaited increase in ECB interest rates sent government borrowing costs racing upwards in mid-June, with the increase felt particularly keenly in more fragile countries, like Italy.

The widening spread between at-risk countries and those of Germany — a closely followed measure of bond market stress — prompted a response from ECB policymakers.

Following an emergency meeting, the central bank pledged more “flexibility” and said it would complete the design of a tool to limit bond pressure.

Despite criticism from some corners of the eurozone, notably in Germany, the ECB’s moves were “in the interest of all euro area countries”, Panetta said.

Tackling the “excessive reaction by market yields” was “necessary” for the bank to keep prices stable and return inflation back to its two-percent target.

Growing borrowing costs put a few eurozone members under acute pressure, potentially triggering “self-fulfilling financial tensions” with debt becoming harder and harder to pay.

Limiting the divergence would also dampen factors that could lead to “too high” inflation in countries with lower borrowing costs.

Soaring inflation in the eurozone has upped the pressure on the ECB to raise its rates more quickly.

Consumer prices rose at a record annual pace of 8.6-percent among the members of the currency club in June.

But cranking up interest rates too quickly risks squeezing eurozone growth further and adding to the stress felt in bond markets.