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Hedgeye Comments:

Draghi was once again tight-lipped on the progress of individual countries, stressing a balance between fiscal consolidation and growth policy as a way forward. Yet when faced with such questions as extremely high unemployment rates across states, especially among the youth, Draghi’s only response is there’s the need to rebalance a distorted labor market. Well how is that going to change over the longer term, or even improve over the intermediate term given the existing structure of the Eurozone?   Draghi is quick to point to states giving up their fiscal sovereignty to Brussels, yet this is easier said than done. We see foot power (strikes and riots) and the job security of Eurocrats prevailing at the country level. Finally, again there is at best hope the LTROs will be a successful program, yet no evidence that loans are hitting the real economy.

We expect broader European data to turn further lower, which may put more pressure on the ECB to act on some of its non-standard measures next month. Remember, the SMP has been on hold for the last seven weeks.

Prepared Remarks:

At the Governing Council of the ECB meeting today, held in Barcelona, the ECB kept the interest rate on the main refinancing operations, and the interest rates on the marginal lending facility and the deposit facility unchanged at 1.00%, 1.75%, and 0.25%, respectively, which is in-line with consensus expectations.

Draghi did not drift far from last month’s statement. On the growth outlook he added that the “latest signals from euro area survey data highlight prevailing uncertainty.” And followed with “at the same time, there are indications that the global recovery is proceeding”.  The ECB’s inflation forecast was in-line, namely that it would stay above 2% in 2012 and should fall below 2% in early 2013. Draghi was quick to cover both ends, saying “risks to the outlook for HICP inflation rates in the coming years are still seen to be broadly balanced. Upside risks pertain to higher than expected commodity prices and indirect tax increases, while downside risks relate to weaker than expected developments in economic activity.”

On the money supply he reiterated that the underlying pace is subdued, with the M3 annual growth rate at 3.2% in March vs 2.8% in February. Draghi noted the annual growth rate of loans to non-financial corporations stood at 0.5% in March while 1.7% to households, both slightly lower than in February.

You can find Mario Draghi’s Introductory Statement to the press conference here:


Highlights from the Q&A:

-Was there any discussion to cut interest rates?   MD: No, found accommodative, despite uncertain background.

-Unemployment is high, austerity is not working. There has been a shift towards a growth strategy. Is this camp right?   MD: I have no comment on specific statements. There is a need for a growth compact. There is no contraction between having both a fiscal compact and growth compact. We need to see fiscal stability. We have to have a fiscal union. We have to accept the transfer of national sovereignty to a central union, a transfer union.

-Is there another LTRO in the works?   MD: No comment, we never pre-commit. With regard to the effects of LTRO, it’s too early to say they are vanishing. What we are really seeing is five things. 1.) We avoided a credit crunch, or one bigger than we see today. 2.) The supply of credit is much less tight than before the LTROs. 3.) A strengthening of the deposit base in several banks across countries, especially those experiencing most difficulty, which is also positive. 4.) The M3 growth pace has recovered from year-end. 5.)  A significant drop in key indicators of financial markets: including a drop in volatility and repo rates.

-How do we weigh fiscal consolidation versus a growth strategy?  MD: The 1970s were years of high deficits, high inflation, and recession, or stagflation. To get out of that, we learned you need to have structural reforms.

-With elections in France, Greece, and Germany this weekend, are you concerned on the rise of parties that are euro-critical?  If Hollande wins, will fiscal compact be put into question?   MD: No comment on any of this.

-There are calls for the ESM to directly support Spanish banks? What are your thoughts?   MD: Such mechanisms like the ESM are useful but cannot replace fiscal consolidation or reforms. We didn’t have a successful experience with the EFSF; it fell short on expectations and needs, because it was created in a way that can hardly work. We think ESM can work better, but we want to make sure the ESM can be used if need be.

-What do you say to the Spanish who say they see no reward after all this austerity?   MD: The government of Spain has made significant efforts in policy reform, all taken in a very short time. We view that that measures taken, namely the LTROs, have been successful in avoiding a major credit crunch. We need time to see this money proliferate to the real economy; we can already see we avoided a much larger credit crunch.  There has been much progress on fiscal front, and this is true for a variety of countries; now, perseverance is very important to reap gains.

Matthew Hedrick

Senior Analyst