October ECB Presser: The Action of Inaction

Takeaway: ECB on hold and Draghi is über confident that he can control risk with the OMTs. We think this attitude is misplaced.

Positions in Europe: Long German Bonds (BUNL)

After ECB President Mario Draghi made his big central bank splash last month the Outright Monetary Transactions (OMTs) programs to buy “unlimited” sovereign bonds of Eurozone members at the bank’s discretion, little was said in today’s press conference in the form of an updated outlook on the economic conditions of the region. There was no clarification to when the OMTs may be activated, on the scope and conditions for the ESM to recapitalize banks, or on the oversight structure of a discussed banking union (that is if the ECB will head a supervisory board or not).

You can find Draghi’s Introductory Statements to the press conference related to inflation, growth and monetary outlook here.

With a unanimous decision the ECB governing council decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively.

On the OMTs, Draghi’s Q&A language seemed to suggest that the program will not be issued in the next weeks, and once again underlined the importance that for the ECB to acquiesce to buying a country’s bonds it must first reach any number of pre conditions (mostly fiscal consolidation) with the country. In so many words he stated that most European countries that would be eligible for the OMTs have both a reasonable debt maturity schedule and debt load, so they’ll not have to use the OMTs given their “open” market access. Further, Draghi said that the OMTs are not a replacement for open market access, meaning that a country that cannot freely issue its own debt is also not a country that the OMT will consider.  So here Draghi is giving a nod to Portugal and Ireland. [Note: this week Portugal did complete a bond swap of 3.76B EUR, purchasing bonds maturing in 2013 and selling bonds maturing in October 2015. This was the country’s first buying since it took a bailout last year].

We believe that Draghi’s OMTs comments present too cavalier of an attitude towards the brewing risks across the peripheral. While we don’t think he’s unaware of the broader risks, he seems to believe that he can blanket the risk so long as he has the OMTs in his back pocket.

Our call remains that there are great risk across the Eurozone ahead, especially in an environment of growth slowing, inflation rising, and economic misses on the back of completely compromised and incorrect economic assumptions from governments. To this last point just last week the Spanish government stated that its GDP would be -0.5% in 2013, while just today Bank of Spain Governor Luis Maria Linde told parliament that GDP would contract -1.5% in 2013, and added that the deficit may be missed.  You think!

October ECB Presser: The Action of Inaction   - cc. ecb rates

Matthew Hedrick

Senior Analyst