Thursday, October 2, 2014

ECB shows some of the money

More questions than answers? At its meeting in Naples, the ECB unsurprisingly decided to keep interest rates unchanged. Moreover, the ECB presented some details of the already announced ABS and covered bond purchasing programmes. ECB president Draghi’s comments at the press conference have increased rather than decreased the likelihood of more action to come. The ECB’s assessment of the Eurozone economy remained unchanged and was almost a verbatim copy of the September assessment. The entire macro-assessment can nicely be summarized with Draghi’s own word: “I have always said that the recovery is weak, fragile and uneven”. Nothing to add here. In ECB language this means that risks to growth remain to the downside. As in September, the ECB stopped giving a direction for risks to the inflation outlook. As regards the ECB’s asset-backed securities purchase programme (ABSPP) and covered bond purchase programme (CBPP3), the ECB presented some technical details after the press conference. The ECB’s purchasing programmes will start in mid-October (covered bonds) and the fourth quarter (ABS) and will run for two years. The details of the ABS programme are limited to purchases of senior tranches and follow more or less the current principles or guidelines of the ECB’s collateral policies. The ECB decided to also accept assets from Greece and Cyprus, but only under certain caveats and additional conditions. In the press conference, Draghi suggested that the ECB would only accept assets from these two countries if they were running under (EU) programmes. This, however, was not reflected in the published texts. Consequently, this could clearly hinder the Greek government’s latest attempts to exit the second bailout programme without a follow-up. The most important issue of the ABS purchasing programme, however, remains unanswered. The controversy about the riskier ABS tranches has apparently not been solved, yet. Remember that several Eurozone governments, particularly France and Germany, had already given the ECB the cold shoulder, refusing to guarantee mezzanine tranches. However, without purchases of the riskier ABS tranches, the programmes will be handicapped before they start. In the official text, the ECB only said that details of purchases of mezzanine tranches will be published at a later stage. In general, the ECB refrained from answering two important questions on the ABS and covered bond purchasing programmes: will there be a country distribution and what will be the total volume? Regarding the volume of all purchases, Draghi made the latest new soft target, the size of the balance sheet, a bit softer. He said that the “potential universe” of all eligible ABS and covered bonds was 1 trillion euro. On top of that come the TLTROs. Returning the ECB’s balance sheet to its size of 2012 (which would require an increase of 1000 billion euro) was an instrument rather than a goal. The ECB obviously sticks to its current strategy of repairing the transmission channel of monetary policy. All measures are aimed at supporting the supply side of the credit economy, ie banks. At several occasions during the press conference, Draghi stressed that monetary policy alone could not restore growth in the Eurozone. He called several times for more (implementation of) structural reforms, the use of fiscal room for manoeuvre and demand-side policies. Whether this was another invitation for Eurozone governments to join another grand bargain, or just another desperate cry in the dark remains to be seen. The experience of the last years, however, tells us that the ECB’s advance payments have hardly ever been matched by equivalent government actions. In this context, the fact that Draghi mentioned the ECB’s unanimous commitment “to using additional unconventional instruments” three times compared with only one time last month is in our view a clear signal that the ECB is determined to do more and even bolder action if necessary.

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