Lagarde’s Moment of ECB Crisis Reckoning, in a London Basement

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Christine Lagarde engineered a fix to the euro zone's most alarming debt turmoil when she was alone in a London hotel.

With a mini heatwave mounting outside, and seemingly armed only with a coffee pot and her iPad, the European Central Bank president took 2 1/2 hours to get her colleagues to act.

The Italian bond crisis was quelled by a two-pronged pledge to counter market speculation.

Lagarde's actions leading to the decision underscore the shift in the philosophy of the European Central Bank, one that is likely to be highlighted at its annual retreat this week.

• Read more on what’s happening in at the ECB’s Sintra meeting  

In particular, as officials who spoke for this story claim, it shows a bias toward confronting turmoil early, enabling calm decision making, in contrast to the panic that gripped the European Central Bank in March 2020 after a mistake by Lagarde preceded the creation of an emergency bond-buying measure.

Multiple people familiar with the matter who spoke on condition of anonymity said that this was the account of the events that brought her to that moment.

The first meeting of the governing council will be in Amsterdam on June 8.

Lagarde wasn't flustered. She shared jokes with the king and queen of the Netherlands as well as admiring Jan Vermeer's masterpiece " The Milkmaid" at the city's Rijks museum.

Despite months of pondering dangers, and a warning nine days earlier by Bank of Italy Governor Ignazio Visco, officials were sanguine about the prospect of stress in weaker euro members' debt markets.

The meeting focused on the pace of tightening. Even though Lagarde didn't reveal a tool to address debt tensions, the adverse market reaction didn't give cause for concern.

A 40-year high in US inflation led to speculation of an out-sized rate hike by the Federal Reserve. Italian yields surged amid a storm. Monday came and turmoil only got worse.

Italian 10-year yields climbed above 4% for the first time since 2014, and as Lagarde discussed the gyrations of Italian bonds with Executive Board colleagues, she wondered if doing nothing was still an option.

On Tuesday, the Board gathers for a meeting in the morning. The president was aware that a conference in Milan featuring seven officials from the European Central Bank was scheduled for later in the week.

Lagarde convinced her board to convene an ad-hoc meeting, even if that meant pre-empting the Fed's scheduled decision, because she argued that market tensions could get worse. The invitations for the video call were sent the same day.

The president is going to London. In Paris, Schnabel gave a speech to a group of students who were bored and bewildered.

My commencement speech, including the slides, on “Unity in diversity - Challenges for monetary policy in a currency union“ can be found on the @ecb’s website: 2/2 https://t.co/zFLRsXHC4l

— Isabel Schnabel (@Isabel_Schnabel) June 15, 2022

An emergency meeting would happen as a result of a leak in the Italian newspaper.

At 10 a.m., the video call began. It looked like Lagarde was conducting the discussion from a nondescript room. She decided to direct the crisis meeting from a corner of the basement of her hotel rather than from the upstairs room she had booked.

The discussion she chaired was calm. The officials decided to act on the basis of the lessons learned from the past that problems can quickly get out of hand.

They agreed as a first defense to tilt the reinvestments of maturing bonds bought under the program toward struggling countries.

It is not yet known if debt buying will be needed in either decision. The hope is that the ECB can come up with a measure that investors will think is strong enough to deter speculation.

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The staff of the European Central Bank is giving the organization advice on when action would be needed, which conditions governments must fulfill, and how to counteract the impact of renewed bond purchases.

Dutch Governor Klaas Knot told the conference back in Milan that they were ready after the decision of the European Central Bank. Italian 10-year bond yields have remained below 4% for the last year.

Lagarde got out of crisis mode back in London. It's not clear why she didn't use the premises where she inaugurated the new office, but she did receive a degree.