Highlights from ECBs press conference today
February 9, 2012
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Lots of interesting tidbits here from ECB chief Draghi’s press conference today. My favorite quote:
The new Fiscal Compact is a major political event. For the first time governments are giving up some of their sovereignty and are ready to put this into their primary legislation. This is a sign that the Euro is strong. It is a first timid step to fiscal union. This will not be a transfer union! All countries should stand on their own without continued subsidies from the others
But, what is the point of being together if you have to mange alone??
I have included my notes below. There are some new info about the LTRO coming up end of month. See also recent Zero Hedge post for more on the weakening collateral position and what it say about the banking sector in Europe.
- ECB has more optimistic outlook than IMF for Europe, especially for Germany
- Don’t see substantial downside, but rather stabilization of economy at a low level
- But lots of uncertainty!
- EU (consolidated) is in much better fiscal shape than the US and Japan
- Inflation expectations are well anchored and remain low
- ECB is very concerned about the current credit crunch, especially to SME (account for 80 % of EU employment)
- Normally large banks would take money from ECB and distribute locally, but with interbank market not working, we have to enable them to get it directly from us
- Therefore the ECB has relaxed the eligibility criteria for LTRO collateral to enable smaller bank direct access
- This will expose the ECB to more risk, but the risk is very, very well managed
- Loans will be over-collateralized by a lot (haircut of 2/3)
- The first LTRO was used by many banks to refinance their own debt; also many are facing higher capital requirements
- We expect more will be used for lending (and purchasing government bonds) in the next LTRO
- What they use LTRO for will be their own business decision (we cannot force them to lend)
- But we are looking very closely at what is happening (with lending) and will review our policy options in 6 month time
- Size of next LTRO will be substantial and (probably) at around same level as the first one
- LTROs are non-standard (extraordinary) monetary policy operations that should not be continued when we get back to normal (funding markets)
- LTRO is not an alternative to a rate cut. LTRO is addressing quantity constraints and liquidity deficiencies. Interest rate changes would address pricing conditions, subject to normal functioning financial markets. Markets are not functioning now, therefore LTRO.
- Difficult for us to say how large next operation will be. There is no stigma attached to LTRO borrowing! There has been some press reports that it is undignified to borrow from the new facility; such “manhood” statements are not correct. Actually many much better banks (than the one quoted) have taken funds under LTRO1. Since this crisis originated as a sovereign crisis, many banks in better placed countries will not need the money. They should thank their countries for being well managed.
- TARGET2 imbalances are inherent in a monetary union. Some are in surplus while others are in deficit. These imbalances are usually not high under normal conditions. Since the interbank markets are not working now, some countries have accumulated balances and others have seen negative balances grow. However, this does not represent any more risk; it is part of the normal functioning of the ECB.
- Greece should focus on reform, not refinancing
- ECB will not take haircut; not our intention to violate monetary financing prohibition
- European Financial Stability Facility (EFSF) is a Government institution, i.e. if we make a loss on a transfer of Greek debt to EFSF, it will be monetary financing (of Governments)
- Another matter if ECB transfer part of its profits to EFSF (i.e. Governments); that is not monetary financing
- The new Fiscal Compact is a major political event. For the first time governments are giving up some of their sovereignty and are ready to put this into their primary legislation. This is a sign that the Euro is strong. It is a first timid step to fiscal union. This will not be a transfer union! All countries should stand on their own without continued subsidies from the others
- Q: Do you have a plan B for Greece? D: We never have plan Bs (we will work this out, but cannot say more until after the EU Council meeting tonight)
- Whatever is decided of haircuts for Greece (Private Sector Initiative) should not lead to precedent for other countries (including Ireland)
- Ireland should be commended for the bold and courageous measures that are being taken