UPDATED: French Finance Minister: must avoid any fragmentation of euro zone bloc

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PARIS, June 15 (Reuters) – French Finance Minister Bruno Le Maire said on Wednesday it was imperative to avoid any fragmentation of the euro zone economic bloc, as the European Central Bank’s policymakers met to discuss a blowout in borrowing costs for some euro zone nations.

Le Maire also told France Inter radio that the ECB needed to tackle rising inflation in a “progressive and anticipated” manner.

Yields of bonds issued by Italy and other debt-laden nations have risen sharply since the ECB flagged a series of rate hikes last Thursday and wound down a debt-buying programme in the face of soaring inflation.

 The European Central Bank’s rate-setting Governing Council will hold an unscheduled meeting on Wednesday morning to discuss the recent sell-off in government bond markets, a spokesperson said.

Bond yields have risen sharply since the ECB promised a series of rate hikes last Thursday and the spread between the yields of Germany and more indebted southern nations, particularly Italy, soared to its highest in over two years.

“The Governing Council will have an ad-hoc meeting on Wednesday to discuss current market conditions,” an ECB spokesperson said.

Ten-year German yields , a benchmark for the 19-country currency union, hit 1.77% on Wednesday, their highest level since early 2014 while their Italian counterparts were 240 basis points higher, the largest spread since early 2020.

The euro surged around a half a percent to 1.0475 against the dollar EUR= early on Wednesday after the ECB’s announcement.

ECB board member Isabel Schnabel, the head of the bank’s market operations, on Tuesday said that the ECB was “closely” monitoring the situation and was ready to deploy both existing and new tools if it found that the market repricing was “disorderly.”

“We will not tolerate changes in financing conditions that go beyond fundamental factors and that threaten monetary policy transmission,” Schnabel said, adding that there were no limits to its commitment to prevent fragmentation. 

She argued that as a first line of defence, the ECB could deploy cash from maturing bonds into stressed markets and if needed, the bank could devise a new instrument.

But Schnabel argued against pre-emptively announcing a tool as it would need to be tailored to a particular situation with conditions, limits and safeguards set on a case-by-case basis.

(Reporting by Balazs Koranyi; Editing by Jacqueline Wong and Sam Holmes)

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