The European Central Bank (ECB) will hold an unscheduled meeting on Wednesday amid growing fears that bond market turmoil is causing a sharp rise in the price of government loans.
Bond yields – which show the price governments have to pay investors to borrow money – have risen sharply amid fears about the prospects for European economies.
The increase in borrowing costs is also coming, as central banks are raising interest rates to curb the jump in the cost of living.
Higher interest payments on debt could hamper the ability of governments to provide financial assistance to households and businesses struggling with huge increases in fuel and energy costs.
“The board will hold an ad hoc meeting on Wednesday to discuss current market conditions,” an ECB spokesman told Reuters.
Bond yields rose sharply after the ECB announced its plan to raise interest rates last Thursday.
The premium that some Member States pay on the risk-free German 10-year bond has spread. Ten-year German income is currently 1.77 percent, while Italian 10-year bonds are 240 basis points higher – the biggest spread since early 2020.
Several eurozone countries are heavily indebted, with piles of debt equivalent to more than their entire annual economic output.
The cost of Covid’s support programs added to the debt accumulated since the financial crisis, which has not yet been repaid.
Bank of Englad is expected to raise interest rates when the Monetary Policy Committee meets on Thursday. This will mean higher borrowing costs for homeowners on variable or tracker mortgages.
In the United States, experts have warned that a closely monitored indicator points to an impending recession.
The “yield curve”, which depicts the amount investors are willing to receive in exchange for government loans, turned negative on Tuesday. This means that investors are pessimistic about the health of the economy.
Long-term government debt usually offers higher returns than short-term debt, as investors block their money for longer. However, when fears increase from a sharp decline, they are willing to accept less for the treasury maturing many years in the future.
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