Thursday, July 16, 2015
Eurozone - Leap of faith
As expected, today’s ECB meeting was all about Greece. ECB president Draghi did not only answer many questions, he also delivered tangibles for Greece: a minor increase of ELA for one week. Together with the Eurogroup’s parallel decisions to grant bridge financing of 7bn and a principle agreement to grant a third bailout package, the Eurozone’s key players took an enormous leap of faith with Greece. As regards the macro-economic situation, the ECB’s analysis and outlook did not change from last month’s. The ECB still expects a broadening of the Eurozone’s economic recovery and gradually increasing inflations rates. Interestingly, the ECB added the slowdown in emerging markets to its downside risks to growth. Remarkably, despite the broadly unchanged macro-economic assessment, Draghi gave an important hint that market participants should forget about tapering any time soon. The ECB reincluded an important paragraph to its introductory statement, saying that the ECB would “continue to closely monitor the situation in financial markets, as well as the potential implications for the monetary policy stance and for the outlook for price stability. If any factors were to lead to an unwarranted tightening of monetary policy, or if the outlook for price stability were to materially change, the Governing Council would respond to such a situation by using all the instruments available within its mandate.” In our view, a clear sign that – contrary to what the ECB said in early June – the ECB is concerned about the sell-off in bond markets and would react by stepping up, rather than reducing its QE activities; at least as long as the recovery is as fragile as it currently looks like. Most of the press conference was dedicated to Greece. Here, Draghi gave many long explanations and statements on the current state of play. The most remarkable two comments and announcements were: i) the ECB decided to increase ELA for Greek banks by 900 mln euro for one week. With this decision, the ECB fulfilled the request of the Bank of Greece and at least symbolically rewarded latest progress in the Greek crisis. ii) Draghi joined the current choir on debt relief for Greece, saying that “it is uncontroversial that debt relief is necessary”; and iii) Greek bonds would become eligible for the ECB’s QE programme once there is a bailout deal and the ESM has disbursed the first tranche of the money. And there was more news from the Eurozone today. After the principle decision that the Eurozone would offer Greece a 7bn euro bridge financing through the Commission’s rescue fund, the EFSM, the Eurogroup today also reached out to Greece. At the same time that the ECB press conference started, the Eurogroup issued a written statement, welcoming last night’s parliamentary green light for the Greek reforms. Moreover, the Eurogroup said that it would in principle grant a three-year bailout package to Greece, obviously only when all conditions as laid out in Monday’s agreement are met. All in all, let’s not get carried away by too much pathos. The Eurozone finance ministers just confirmed what their chiefs had already decided on Monday. Let’s stick to facts: Greece last night took an important first step towards receiving a third bailout package. More important and complex steps and negotiations will still follow. The decision to grant bridge financing as well as today’s ECB decision to increase ELA are no game changer, yet, but at least a symbolic leap of faith.