Preventing the rise of sovereign borrowing costs in the eurozone: what can the ESM and the ECB achieve?
In
Crisis management instruments in the Eurozone have gradually evolved from an ‘ex-post’ perspective- where official financial support would only be granted once a country has lost access to financial markets – to an ‘ex-ante’ perspective- where ‘preventive’ assistance would aim at mitigating this risk. With the ESM’ precautionary financial assistance and the ECB’s ‘Outright Monetary Transactions’, Eurozone countries can now potentially benefit from preventive interventions in their sovereign bond markets. Such interventions can in principle prevent their sovereign borrowing costs from reaching unsustainable levels. This paper discusses the principles and implications of such interventions. The author argues that while the ECB suggested strategy –that of a combined interventions by the ESM on primary markets and the ECB on secondary markets – is certainly the most efficient and viable strategy available, it should nonetheless not justify complacency. For the initial positive market reaction would wane over time if insufficient efforts are pursued at national and EU levels.
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