ECB keeps powder dry

The ECB left interest rates unchanged at today’s meeting, somewhat weakened its easening bias and still refrains from an active role in a Greek debt restructuring.

The ECB’s assessment of the Eurozone economy was hardly unchanged from the January meeting. Actually, it was almost a verbatim copy. The economic outlook is still subject to downside risks, while the risks to price stability main balanced. In fact, latest data releases have proven the ECB right. Since the January meeting, the number of tentative signs of stabilisation at a weak level have increased. However, there was one small but important change to the ECB’s introductory statement. While the economic outlook was subject to “substantial downside risks” in January, it is now only subject to “downside risks”. A slight weakening of the easening bias.

The ECB clarified another series of new tools from its crisis-management toolbox to further fight a credit crunch in the Eurozone . Seven national central banks (Ireland, Spain, France, Italy, Cyprus, Austria and Portugal) will get more flexibility and freedom for the temporary acceptance of additional credit claims as collateral. National central banks will be reliable for eventual losses, not the Eurosystem. These measures come on top of the two 3-year LTROs. As regards the LTROs, Draghi remarked that taking up money under the 3-yr LTRO should not be considered as a stigma, but rather as a business decision. The ECB is trying everything it can provide the financial sector with liquidity.

Of course, the probably most interesting issue at the press conference was Greece and the role of the ECB’s holdings of Greek bonds in any private and/or official sector involvement to improve Greece’s debt sustainability. During the press conference, there was breaking news from Athens that the Greek government had found an agreement on more structural reforms and austerity measures. The plan will be presented to the other Eurozone finance ministers at a Eurogroup meeting tonight. As we all know, the decision on a complete second bailout package does not only depend on Greek efforts but also on upfront debt restructurings. In recent weeks, the discussion on who should take losses went beyond the private sector and started to involve the ECB.

At today’s press conference, ECB president Draghi for a long while refrained from answering any questions on a possible ECB role in a Greek debt restructuring. However, the longer the press conference, the more talkative Draghi. Even if he stuck to the line that nothing had been decided, yet, reading between the lines yielded some interesting messages. The idea that the ECB could share the losses of the PSI was “unfounded”. Moreover, Draghi repeated several times that financing government debt by the ECB was forbidden by the Treaties. In this context, Draghi also said that giving money to a bailout programme was prohibited. Even selling the ECB bonds to the EFSF could be seen as government financing. Taking profits and redistributing these to the national central banks might be a possibility. The ECB’s role in any PSI or OSI still hangs in the balance. It is obvious that the ECB is not willing to take a loss and even hesitant to sell to the EFSF. We might know more after tonight’s Eurogroup meeting in Brussels.

In its role as the fire brigade for the Eurozone economy, the ECB is leaning back, keeping its powder dry and will wait-and-see. In its role as the fire brigade for the Eurozone debt crisis, the ECB still has got its hands full. Rate cuts, however, are not yet off the table, but are highly conditional on growth.