How Christine Lagarde tamed the bond market from a London basement


Sitting alone in a London hotel basement, Christine Lagarde charted a solution to the eurozone’s most alarming debt turmoil since the pandemic broke out.

With a mini-heatwave brewing outside, and apparently armed only with a coffee pot and her usual iPads, it took the European Central Bank President just two and a half hours to get colleagues on the Governing Council to act during an emergency video call on June 15 to move .

Their response – a two-pronged promise to counter market speculation – was enough to quell a burgeoning Italian bond crisis without spending a single extra euro.

A decade after her predecessor Mario Draghi, also in London, contained far worse debt turbulence, Lagarde’s actions, which led to the decision to underscore the ECB’s shifting philosophy to markets, are likely to be touted in Portuguese at their annual retreat this week Resort of Sintra.

In particular, as officials who spoke for this story claim, it shows a tendency to deal with turbulence early on and allow for calm decision-making – in contrast to the panic that gripped the ECB in March 2020 after a misstep by Lagarde in creating it an emergency was preceded by a bond purchase measure.

This is an account of the events that brought her to this critical moment, briefed by several people familiar with the matter and speaking on condition of anonymity.

It begins on Wednesday, June 8th, in Amsterdam with the first Government Council decision-making session outside of Frankfurt since 2019.

Despite months of consideration of dangers and a warning from Bank of Italy Governor Ignazio Visco nine days earlier, officials were optimistic about the prospect of stress in the debt markets of weaker euro members as they unveiled a plan to raise interest rates formalized.

Their two-day meeting focused primarily on the speed of the tightening.

Speculation about a tool to deal with debt tensions had been piling up ahead, leading to disappointment when Lagarde didn’t unveil one, but still the negative market reaction was not yet cause for concern.

In the space of 24 hours, officials watched the picture change significantly as a 40-year high in US inflation sparked speculation of an outsized rate hike by the Federal Reserve.

Amid a storm that gripped global markets, Italian yields continued to climb, climbing above 4 percent for the first time since 2014. As Lagarde discussed the volatility of Italian bonds with fellow board members, including chief economists Philip Lane and Isabel Schnabel, and senior officials, she began to wonder if doing nothing was still an option.

Arguing that market tensions could deepen, Lagarde persuaded her board that it was time to reconsider the ECB’s crisis plan and convene an ad hoc meeting, even if it meant forestalling the Fed’s planned decision.

Invitations for a video call the next day were sent.

As Wednesday, June 15 dawned, expectations rose as a leak surfaced in Italy Corriere della Sera Newspaper announcing an emergency meeting.

When the video call began at 10am London time, Lagarde appeared to be leading the discussion from a fairly empty, nondescript room. Officials chose to act on the basis that past lessons showed that persistent problems can become overwhelming all too quickly.

They agreed to tip reinvestments of maturing bonds bought as part of their pandemic program to ailing countries as a first line of defense and also to speed up work on a new crisis instrument.

Neither decision actually involved an immediate debt purchase, and it remains to be seen whether such purchases will be required.

Indeed, officials still harbor hopes that the ECB can develop a measure that investors see as strong enough to deter speculation.

The ECB is now awaiting staff advice, including defining when action would be warranted, what conditions governments need to meet and how to neutralize the impact of renewed asset purchases on the balance sheet – ideally for its July 21 decision.

After the ECB’s decision was released in a statement, Dutch Governor Klaas Knot urged the Milan conference to “stay calm, we are ready”.

Meanwhile, Italian 10-year bond yields have stayed well below 4 percent since then.

Turbulence could flare up again, but for the time being the June 15 action is one of the ECB’s most effective empty phrases under Lagarde’s leadership.

And instead of the circumstances surrounding Draghi’s glitzy declaration of “doing whatever it takes” to protect the euro, she contained a crisis early on.

That’s not to say the ECB has escaped criticism.

Last Monday, Lagarde was accused of subterfuge when she found herself in another capital, Brussels.

“Do you think your governing council makes decisions or just announces them behind the markets?” Jonas Fernandez, a member of the European Parliament from Spain, asked her, noting, “I think the ECB acts behind the markets.”

When Lagarde disagreed, she insisted officers be quick with tensions.

“You have to nip it in the bud, you don’t want to allow fragmentation to happen,” she said.

“You want to prevent that, and you want to prevent it.” How Christine Lagarde tamed the bond market from a London basement

Fry Electronics Team

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