Positions in Europe: Short France (EWQ)
The ECB surprised and cut 25bps in the main interest rate to 1.25% this morning in the first meeting of newly-minted ECB President Mario Draghi. In many ways, his comments on inflation were a continuation of Trichet’s, namely that inflation is likely to stay above 2% for many months, but come down to below 2% in 2012; ongoing tensions in financial markets are likely to dampen the pace of economic growth in 2H11 and in 2012 and make downside revisions to growth forecasts, especially in 2012, "very likely"; and the pace of monetary expansion continues to be moderate.
For the full press statement, see:
Some key points of the Q&A included:
- the 25bps cut decision was unanimous.
- the Bank is monitoring the Greek situation, but maintains that a “Sovereign Signature” is the pillar for financial stability, meaning each member state is responsible for enacting fiscal policy to minimize budget imbalances, grow GDP, and reduce unemployment.
- the SMP remains a temporary and limited facility that is justified by monetary policy considerations. It will continue to buy secondary issuance alongside a continued assessment of conditions.
- On Greece leaving the Eurozone, Draghi maintains that it’s not in the treaty for a country to leave, therefore it cannot be envisaged by the Bank.
- He expects a mild recession in Europe over the medium term with a weakening business cycle that should dampen wages and prices, and therein lower overall inflation; however he does not see the threat of deflation.
- On Italian spreads breaking out, Draghi noted that for many years leading up to the last three, spreads across European countries were very thin, but were not reflecting true differences across growth, employment, competitiveness. Now, since the global recession, there’s been a heightened risk aversion trade as more analysis has revealed the greater risk (imbalances) across countries. Yet he believes whereas risk spreads may have undershot in earlier years, over recent years they may be overshooting. That said, individual states, and not the ECB, are responsible for alleviating these imbalances through prudent fiscal policy.
- On China bailing out the Eurozone? -No Comment.
- On his policy positioning versus the Bundesbank? - Draghi stated he has great admiration for the Bundesbank, but only time will tell how closely he follows that model.
Overall Draghi had very direct and contained answered to many of the questions asked, but like Trichet simply ignored questions surround the state of Greece – from bailout needs to Greece leaving the Eurozone. Stubbornly, like Trichet, he views the ECB with the sole mandate of price stability through monetary policy. What’s clear is that fiscal assistance is needed for many member countries –meaning they can’t do it “alone” through fiscal tightening—yet the one institution with the credibility and balance sheet (including through printing money), the ECB, remains with its back turned.
We view the structure of joining uneven countries under one currency and monetary policy as highly compromised. Given the existing environment in Europe, we'd expect the ECB to bend off its mandate and help alleviate the run-away risk confronting the region over the last months.