Tight-Lipped Draghi Goes Further Non-Standard

--When questioned on the ECB’s position of taking a loss on its Greek holdings, swapping its Greek holdings with the EFSF, or contributing in some way to “sharing” losses on its Greek holdings, Mario Draghi was tight-lipped, responding that the actions were either a violation (hinting that the ECB’s position against it wouldn’t change) or that he’d reserve a response until after tonight’s Eurogroup meeting (suggesting that a change of position couldn’t entirely be ruled out).  In the last hours, the Greek government has concluded talks with Troika on the issue that “remained open for further elaboration”, according to a press release. Already Germany’s Finance Minister Schaeuble says spending cuts appear to not yet fulfill bailout conditions. Please see our note yesterday titled “Greek PSI Is NOT Getting Done”, for the challenges we see ahead for participating parties to come to “agreement”.  Below we include the key language of the Bank’s interest rate decision today and further below we provide select Q&A from Mario Draghi’s (MD) press conference.


The ECB’s governing council decided to keep key interest rates unchanged today. The language on its main outlook on the economy was revised to “tentative signs of stabilization in economic activity at a low level” versus “substantial downside risks” in the previous report, however the ECB was quick to cover that “this outlook is subject to downside risks”. On inflation, the Bank holds roughly the same view, namely that inflation is “likely to stay above 2% for several months to come, before declining to below 2%.” 

Finally, on the pace of monetary expansion, Draghi noted that annual growth rate of M3 decreased to 1.6% in December 2011, after 2.0% in November. He highlighted that loans to the non-financial corporate sector were “particularly pronounced” and that “there are indications that bank lending conditions tightened further, affecting loan supply in several euro area countries in late 2011. It is not yet possible to draw firm conclusions from these developments, particularly given that the impact of the first three-year LTRO on bank funding is still unfolding and may not have been fully reflected in the most recent bank lending survey.”

For more specifics, see this ECB press release:


ECB Adding Risk to its Balance Sheet:


Draghi issued additional non-standard monetary policy measures, including new eligibility criteria for additional credit claims, which can only mean that the ECB will take more risk on its balance sheet.  The specifics were left to the National Central Banks (NCBs) to publish on. Of the NCBs participating (Central Bank of Ireland, Banco de España, Banque de France, Banca d’Italia, Central Bank of Cyprus, Oesterreichische Nationalbank, and Banco de Portugal) that had updated their websites on the measures, here are the changes:

Austria’s NCB: “To enable Austrian banks to optimize their liquidity management, the OeNB has decided to lower the minimum credit score for credit claims to a one-year default probability of 1% on the part of the debtor. The related risk of the OeNB will be overcompensated by strongly raised haircuts.”

Spain’s NCB: “The Banco de España will accept performing corporate and Public Sector Entity credit claims, other than mortgages, that are denominated in euro or in major foreign currencies and whose estimated credit risk, as assessed by the Banco de España using reliable sources, has a probability of default equal to or lower than 1%, although initially it will accept only collateral with a probability of default equal to or lower than 0.4%. Credit claims not governed by and structured in accordance with Spanish law might be accepted, at a later stage, subject to individual legal assessment. “

For the ECB’s press release, see:


Top 3 Q&A Responses:

-What’s the ECB’s position on Greece?   MD: For some reason, we focus on financing things. But reforms are the most important aspect, and then on the rest. On PSI we’re not a negotiating party. Everyone’s talking about what the ECB could do, however the ECB hasn’t said anything, and I won’t here.

-Why can’t you announce the value of the ECB’s Greek holdings?  Will the ECB take haircuts?   MD: I want to wait for the outcome of the Eurogroup meeting. I will not answer if the ECB will take haircuts on its bonds.

-You’ve warned against tricks that go around the spirit of the European treaty. Are these tricks legal options for Greece?   MD: Talks about the ECB sharing the losses in Greece is ungrounded and unfounded. The idea that the ECB gives money to a program (country), which is monetary financing, is a violation. But, we will wait to see what comes of tonight’s Eurogroup meeting.  

Additional Q&A:

-In your introductory statement you no longer say that downside risk is “substantial”, does this mean less easing going forward?  MD: we came from a very weak Q4, but see a stream of surveys and hard data of low stabilization. But uncertainty is high, related to global economy, sovereign tensions, credit markets, and global growth.

-How big will demand for 2nd LTRO be?   MD: specialists say it should be substantial and around the previous one, but frankly we have no more information to share. The LTRO is a business decision, to lend to the real economy, as we saw tight lending across corporates and households.

-Will there be future LTROs?   MD: if the interbank market functions, there’s no need for additional LTROs, which is a temporary, non-standard measure. 

-Is the fiscal compact pact a durable quantum leap?  MD: yes, a major event. It testifies to the willingness of member states to partially release sovereignty in the budget area, including the readiness to accept budget changes in primary legislation. It’s a sign that the Euro is a strong reality, and that all participating members can stand on their own, without being subsidized by others.

-Will the ECB hold all its bonds to maturity?   MD: No need to change our positioning.

-There’s a focus on Target 2. Could claims of the Bundesbank against other countries be a problem for Germany’s credit rating?    MD: Target 2 balances are normal and inherent in a monetary union. Usually you don’t observe high imbalances, because the interbank market functions. But stress will arise when interbank markets don’t function, however there’s no more risk for creditors because there’s a central platform [to backstop] the system, which is the ECB.

-The ECB seems less pessimistic about Eurozone growth than the IMF?   MD: this is true.

Matthew Hedrick

Senior Analyst