ECB Press Conference Substantiates That The “Bazooka” Is Off The Table

The ECB’s governing council decided to cut key interest rates by 25bps today. It’s main outlook on the economy, inflation, and monetary expansion, largely remained in line with last month’s report.

For more specifics, see this ECB press release:

http://www.ecb.int/press/pressconf/2011/html/is111208.en.html

The council also decided to add additional non-standard (and temporary) measures to better support credit to households and corporation by issuing 2 longer-term refinancing operations (with a maturity of 36 months) and lessening collateral requirements.

For more specifics, see this ECB press release:

http://www.ecb.int/press/pr/date/2011/html/pr111208_1.en.html

However, more interesting than Draghi’s prepared comments, especially as it related to the likely outcome of tomorrow’s EU Summit, were his responses to the Q&A. Here he very definitively rejected any talk that the ECB may revert from its mandate of price stability, meaning monetary financing is off the table, outlining that neither the ECB nor the National Central Banks (NSBs) are in a position to print money to leverage/expand the EFSF or lend to the IMF to have funds redirected to member countries given “the spirit of the EU treaty”. These answers further confirm our stance that tomorrow’s announcements will mainly focus on a fiscal union, which will disappoint investors’ expectations (For more see today’s Early Look titled “Incredibly Hobbled”).  European equity indices and the EUR/USD fell alongside the announcement.   


Top 3 Q&A Responses:


- Why can’t the ECB act like the Fed or BOE to print money and directly aid countries?    MD: WE have a treaty that states the primary mandate is maintaining price stability, not monetary financing.  When the treaty was written in early 90s there were some countries suggesting financing governments by money printing. Our treaty embodies the best traditions of Bundesbank, where monetary financing is prohibited.

-Will the ECB aid countries through third parties like the IMF or EFSF? What about NSB lending to the IMF, would the ECB block? Is it legally allowed to?    MD: The ECB is not an IMF member. Legally complex, but given the spirit of treaty, the ECB can’t channel money to circumvent the treaty. If NSBs want to lend to the IMF, which would then lend to say China, that is fine. But if the IMF uses the money to buy bonds in Euroarea, this is not compatible with the treaty.

-Can you clarify your recent comments that “other elements will follow” about a Fiscal Compact?   MD: A compact = an agreement, or community pact. There are three pillars: 1.) national economic policies for stability, growth, and job creations; 2.) Rules at the EU level—that is fiscal rules enshrined in laws that place limits on deficits and debt. They would be automatic. 3.) Stabilization mechanism- we know the effects from lack of credibility and confidence, therefore pillars 1 and 2 are essential.   


Additional Q&A:


- Any call for a 50bps cut?  MD: No, discussed 25bps, some in favor, some not.

-How do you envisage the EFSF and ESM working together?   MD: EFSF first, ESM later, and fully operational as soon as possible.

-Thoughts on last Italian budget plans?  MD: Developments encouraging. It is a critical budget that will strengthen confidence.  Essential is in the delivery.

-Fear of deflation?   MD: Don’t see high probability of deflation.

-Is there a limit to bonds purchased by the SMP?   MD:  It is still a temporary program.

-Has the governing council discussed a cap on bond yields or spreads?   MD: No never discussed.

-Will slowing growth require more adjustment?   MD: Fiscal consolidation is unavoidable. What can be done to offset contraction?  Confidence Enhancing Effects - - structural reforms to enhance competitiveness and job growth… so [countries] can count on external demand, exports, [to grow].

-When you follow the headlines there are more breakup talks. Are they self-fulfilling prophesy?   MD:  What matters are facts, not psychology. If we make progress on a new EU contract, I think confidence will return.

-The money market is clogged up, and feels like post Lehman, true?   MD: We have a deposit facility at levels similar to the Lehman period. Despite ECB measures for liquidity, much of it is re-deposited with the ECB, so it’s not re-circulated. We’re also seeing deleveraging by banks which are significance. We see funding pressures as banks need to raise capital ratios. So to some extent, the measures today are to address these funding pressures.  Wider use of collateral and lengthening of term should give confidence to banking profiles, especially as a number of bonds come to maturity next year. I believe 230 Billion EUR of bank bonds are coming to maturity in Q1 alone. 

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Matthew Hedrick

Senior Analyst