European Central Bank to gather after borrowing costs rise

The European Central Bank’s rate-setting council will hold an unscheduled meeting Wednesday ‘œto discuss market conditions,’ with borrowing costs for several countries having risen after the bank said it would raise interest rates.

The bank last week announced the hikes in July and September without specifying how it would protect countries sharing the euro currency if borrowing costs rose excessively – as they did in the European debt crisis in 2010-2012. That’s a concern for heavily indebted governments, most notably Italy.

The spreads for Italian and Spanish debt over safe German government debt – a key fear index for the 19-country eurozone – have risen after the ECB made only vague promises to prevent financial ‘œfragmentation,’ or interest rates in individual countries that are so high that they do not reflect the bank’s benchmarks.

The ECB has a bond-market backstop in which it could step in and buy the debt of a troubled country. That tool helped calm the debt crisis a decade ago after the bank announced it in the wake of its then-President Mario Draghi’s promise to do ‘œwhatever it takes’ to keep the eurozone from breaking up. But that program, which never actually had to be used, can come with onerous conditions.

Holger Schmieding, chief economist at Berenberg bank, said the ‘situation today is different from the euro crisis a little more than a decade ago’ because countries have improved growth prospects and the ECB has the bond-market backstop in its back pocket if needed.

Current conditions ‘should not present an imminent risk even for fiscally challenged Italy,’ he said.

The ECB’s surprise meeting comes the same day that the US Federal Reserve is expected to announce its largest interest rate hike since 1994.

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