While the one-needled compass would clearly allow the Governing Council to take a longer vacation break, the phasing out of the ECB’s liquidity measures is continuing. Which measures were today unwound? Firstly, the 6-month longer-term refinancing operation (LRO) of 31 March will be the last one of its kind and it will be conducted at a floating rate, like the December 12-month LRO. Secondly, as of the end of April, 3-month refinancing operations will return to their normal structure with a variable rate tender procedure. All other measures remain in place: one-week and one-month refinancing operations will continue to be conducted at fixed rates with full allotment, at least until 12 October 2010. As a consequence, excess liquidity through full allotment will remain in the markets at least until early November, enabling banks to rollover any needs from the expiring first two 12-month LROs.
Of course, besides the ECB’s exit strategy, Greece and the austerity measures presented yesterday were the dominant topics of the press conference. However, Trichet only reiterated the ECB’s official position which welcomed the convincing additional and permanent fiscal consolidation measures. According to Trichet, the measures were “a key signal both for the long-term fiscal sustainability and for substantially enhancing the price and cost competitiveness of the Greek economy”. Despite this moral support, Trichet refrained from further comments.
To sum up, the Greek roadblock on the exit strategy has become a speed bump. The phasing out continues but at a much slower pace. Generous liquidity provisions were effectively extended until November. By returning to variable rate tenders at the 3-month operations and keeping full allotment at the shorter maturity, the ECB is trying to gradually get its grip back on money market rates. If this strategy works, the ECB could theoretically start hiking rates before all liquidity measures end. However, this theory, reality is often different.