Christine Lagarde apologises for botched communication of ECB strategy

Christine Lagarde has apologised to other members of the European Central Bank’s governing council for her botched communication about its new monetary policy strategy which triggered a bond market sell-off last week.

Speaking to the ECB’s top decision-making body in a call on Friday, the central bank’s president said she was sorry for comments that led to the biggest single-day fall in Italian government bonds in a decade, two people involved in the call told the Financial Times.

In Thursday’s press conference Ms Lagarde said it was not the ECB’s role to “close the spread” in sovereign debt markets — referring to the gap between Italian and German bond yields that is a key risk indicator for Italy.

The remarks stirred fears the ECB was retreating from being a lender of last resort to Italy just as concerns intensified about the economic impact of coronavirus, which has infected 24,747 people and killed 1,809. Economists predict Italy is heading into a deep recession, while the country’s €25bn of extra spending will inflate its already high debt levels.

In Thursday’s press conference Ms Lagarde also rebuffed suggestions that she hoped to emulate Mario Draghi, her Italian predecessor as ECB president whom she replaced in November, saying that she did not seek to be “whatever it takes, number two”.

Her apology at the start of a conference call to discuss a different matter on Friday was welcomed by several ECB governing council members, who had been unsettled by her comments to the media.

“It was a mistake by the president but she immediately reacted to correct it and she apologised,” said one. “This will be very bad if it lasts. But my impression is that she doesn’t really think that.”

The ECB declined to comment on Sunday.

Ms Lagarde backpedalled quickly after her press conference by stating in a televised interview that she was “fully committed to avoid any fragmentation in a difficult moment for the euro area”.

The ECB’s chief economist, Philip Lane, also sought to reassure investors that the central bank was not leaving Italy to fend for itself, after the country went into lockdown to halt the rapid spread of the virus. In a blog post he said the central bank was “ready to do more” to contain any sovereign debt stress.

Another governing council member said: “She just lost concentration. It was her first major policy decision and it was a very complicated situation. I think her mind was somewhere else.”

The two governing council members said they still thought Ms Lagarde was the right person to lead the ECB.

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However, Ms Lagarde’s comments were applauded in parts of Europe, particularly in Germany. “As President Lagarde rightly said, it is not for the eurosystem to reduce interest rate differentials,” a group of mostly retired senior German officials wrote in the Frankfurter Allgemeine newspaper on Sunday.

The group, including former Bavarian prime minister Edmund Stoiber, former German finance minister Peer Steinbrück and former German economy minister Wolfgang Clement, also called for the ECB to start raising interest rates “after the [coronavirus] crisis has subsided”.

Unlike Mr Draghi, who was best known for promising to do “whatever it takes” to save the euro from its debt crisis in 2012, Ms Lagarde is not an economist and she has little direct monetary policy experience. Soon after becoming French finance minister in 2007, Ms Lagarde was dubbed “Madame la Gaffe” when her plain-speaking style landed her in political hot water. But she was widely seen as a safe pair of hands in the financial crisis and in her eight years running the IMF.

The ECB last week announced plans for €120bn of extra asset purchases — on top of its €20bn-a-month existing programme. Mr Lane said this showed it would have “a more robust presence in the bond market during phases of heightened volatility”.

The new monetary policy package — including more cheap loans and lower capital requirements for banks — was agreed unanimously by the ECB governing council. But some members indicated they would have preferred a bigger “envelope” of extra bond purchases.

The ECB has bought a total of €2.6tn of assets, including about €364bn of Italian sovereign bonds, since starting the programme in 2015. This helped to bring interest rates across the eurozone down towards those of Germany, which has negative yields on almost all its government debt.