“The President of the European Central Bank, Christine Lagarde, affirmed on Monday that tackling the spreads between sovereign borrowing rates is “at the heart of the mandate” of the institute, defusing critics who would consider that the ECB is stepping out of its role. . The ECB defines its monetary policy for nineteen countries in the euro zone and “the fight against fragmentation” is “a precondition for the good transmission” of this policy, she declared during a hearing before Parliament European. »
Let’s resume quietly and without panic, you will be able to show off in your dinners in town in less than 5 minutes with your learned explanations on the rate spreads!
A “spread” is an English term (like almost all the time when you want to look professional and modern) generally used in finance to designate a differential, that is to say a difference that exists between two indices or two rates .
To make it even simpler “spread” = difference.
But admit that it’s more pedantic to say spread, whereas it’s very “attic” to say “gap”.
So as we are among the people of the attic, let’s keep it simple.
The ECB therefore considers that in its prerogatives, in its responsibilities (this is the mandate we are talking about) there is the fact of ensuring that the spreads in borrowing rates between the various countries of the euro zone do not become too important.
If Germany borrows at 1 and Italy at 5 the spread, the difference, is 5-1 =4! (you see you too have mastered the high-flying mathematics of big finance).
This fight against fragmentation “is at the very heart of the mandate” of the ECB, hammered the French. The monetary institution had to react urgently last week to show its determination to counter any slippage in rates in the euro zone and any panic on the Italian debt.
“Nobody should doubt our determination and our commitment,” says Christine Lagarde. Because if it does not react, the ECB “is not doing the job entrusted to us by the treaty, which is to guarantee price stability” defined by inflation at 2%, she argued. The ECB announced last week that it was going to develop a new “anti-fragmentation instrument” to control the famous “spreads”.
Well these stories of interest rate differentials have nothing to do with price stability and everything to do with the indebtedness of States, but the ECB has to justify its actions, but this is almost “foutage mouth “because to avoid rate differentials, the ECB will have to buy the debt of the countries threatened to lower the rates precisely. And the ECB, by buying government debt, will increase the money supply and therefore inflation!
The more the ECB avoids fragmentation, the more it will be forced to print money, and the more it will drive up inflation.
There you go, you know almost everything about “spreads”!
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Source AFP via BFM here