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--Below we’ve dictated the major highlights from the ECB’s Q&A press conference this morning. A few key take-aways include that President Mario Draghi remains hands off in issuing another “bazooka” to the market, noting the effects of the 2nd LTRO have not been fully realized; he didn’t rule out another LTRO or the re-engagement of the SMP down the road. But more than anything, he reaffirmed the need of individual governments to stay the course of fiscal consolidation, the fruits of which he indicated may not be born out tomorrow, but could take 10 years. He kept his cards tight and was optimistic that much work can be accomplished by Eurocrats in the upcoming Summits and meetings to limit tensions, but noted that there is no “silver bullet” to solve the Eurozone crisis. On the ESM getting a banking license he did not provide an explicit answer, but argued the merits of an amendment or not.

Our take-away is the ECB is now marginally closer to cutting rates, reengaging the SMP, or providing additional non-standard measures at its next meeting in July, however, for now the ECB wants to see the outcome, if any, of the 28-29. June EU Summit. The work of individual governments to consolidate fiscally and solve for this "crisis" remains Draghi's unrealistic crutch.


At the Governing Council of the ECB meeting today 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.

ECB President Mario Draghi announced that the council decided to continue conducting its main refinancing operations (MROs) as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the 12th maintenance period of 2012 on 15 January 2013.

Draghi did not drift far last month’s statement. On the growth outlook he said that the Eurozone economy should recover gradually, however he quickly followed that on-going tensions continue to dampen underlying growth momentum.

The June 2012 Eurosystem staff macroeconomic GDP projections are -0.5% and 0.3% for 2012 (UNCH vs previous projections) and between 0.0% and 2.0% for 2013 (vs 0.0% to 2.2%).

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.

The June 2012 Eurosystem staff macroeconomic projections for the Eurozone foresee annual HICP inflation in a range between 2.3% and 2.5% for 2012 (vs 2.1% to 2.7%) and between 1.0% and 2.2% for 2013. 

On the money supply he reiterated that the underlying pace is subdued, with the M3 annual growth rate at 2.5% in April, down from 3.1% in March. Draghi noted that the annual growth rate of loans to the private sector declined to 0.8% in April (from 1.2% in March), owing to negative loan flows to non-monetary financial intermediaries. At the same time, monthly flows of loans to non-financial corporations and households were moderately positive in April and the annual rates of growth stood at 0.7% and 1.5% respectively in April, broadly unchanged from March.

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


Highlights from the Q&A:

-Was the decision to keep rates unchanged unanimous?   MD: a few members would have preferred to have a rate cut today. I’d say not many.

-How does the ESM get a banking license?   MD: the present structure forbids direct recapitalization of banks. There two opposing ways to view this. One is that banks could recapitalize without the debt of the country going up by using the ESM. However, if the ESM is used to recapitalize banks, then the ESM will take on bank shares and become a shareholder? The question is that the ESM was not born to be a shareholder. The answer is still not clear. 

-Will we see further extensions of collateral and lower requirements?   MD: we have to assess funding conditions of banks. We do not think all of the effects of the 2nd LTRO have been exhausted.

-Is the efficacy of rate cut limited?   MD: we think the rate is appropriate but have to keep in mind liquidity constrains and tension in financial markets.

-What is the state of fiscal consolidation across Europe?   MD: Great strides have been made. The full benefits of fiscal consolidation may take 10 years time.

-What is the ECB’s position around cutting to the zero bound?    MD: as you know we never pre-commit.

-How effective have the LTROs been?   MD: there’s plenty of liquidity in some areas, shortages in other areas. Some issues throughout Eurozone have nothing to do with monetary policy, which we will continue to evaluate.

-Is the market over reacting to the developments in Europe? What’s your comment to George Soros’ three month deadline for Europe to find a solution?   MD: I don’t see how one/he can put a deadline on the complexity of Eurozone issues. Certainly there is a sense of concern. There is fragmentation across markets. The fears are not incorrect. What observers however underestimate is the strength of the political commitment of the governments of the Eurozone states. We’ve had many years of price stability and strong growth. We must figure out how to deal with this long term goal [of stability and growth] with the near and intermediate tensions. We just need to clarify this decision.

-You’ve left the window open for another LTRO, what about a reactivation of the SMP?   MD: the instrument is there, it is temporary and not infinite. This applies to both facilities.

-Can Spanish banks receive help without going through the Spanish government?   MD: the question revolves around if the banks want access to the EFSF or not. Very soon, probably Friday, the first assessment by the IMF on the recapitalization needs of Spanish banks will be available. But we will have to also wait for the assessments of firms hired by the government to review the banks. Any decision on EFSF should be based on realistic assumptions and needs to recapitalize the banks.

-If ECB brings interest rate below 1%, it would be at level last seen in response to the Lehman Brothers collapse. Is the environment this time around comparable to the Lehman period?  MD: the answer is no. To a great extent we know what the problems are today, which wasn’t the case for Lehman.

-There are many concerns that the debt crisis in Europe is spreading to the rest of the world, what message would you send them?  MD: it is true that there is a capacity of Euro crisis to effect rest of world. But if you carry this reasoning too far, then we are really saying that the USA is a small, closed economy. I don’t find this to be the case. Europe may have its problems, but many other countries also have their own problems they must deal with. This may be the message at the G20 summit in Mexico. All countries must work together, to address their own problems, and then worry about spillovers of policy, or lack thereof, in other economies.

Matthew Hedrick

Senior Analyst