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Kiron Sarkar
June 6, 2012
Whilst I did not expect a cut in ECB interest rates today, there were a number of interesting comments by Draghi today.
He stated that the decision to keep rates on hold was taken by the majority, but was not a consensus - "a few" wanted a lower interest rate. However, he left open the possibility of a cut in July - remains likely in my view;
As expected, he has (effectively) confirmed that it is up to EZ politicians to act. This reiterates the comments he made last week. The whole press conference/policy statement was designed to ratchet up pressure on the EZ politicians - clever old Draghi and absolutely right. He stressed the commitment of EZ politicians to the Euro/EZ - yes but get your act together and soon, boys and girls, was his message;
The biggest surprise was the lack of adjustment to the ECB's March economic data. Apparently the data released did not reflect the most recent (much weaker) data - simply don't understand this. As a result, I would expect both EZ growth and inflation forecasts to be revised materially lower, which provides the opportunity to reduce rates;
Surprisingly, he stated that upside/downside risks "remained balanced" - clearly not the case, in my humble view, as downside risks far outweigh upside risks to, say, inflation, which the ECB suggests will be 2.4% (mid range) this year - clearly nonsense . He did suggest that there were downside risks to growth. He added that commodity price rises could increase inflation - cant understand that at all, as commodity prices have declined materially;
He reported that both corporate and personal credit had increased marginally, though monetary expansion remained "subdued". A bit of a stretch;
He was (in my opinion) less than keen on another LTRO programme - Draghi's right, in my humble opinion, as I continue to believe that a further LTRO programme will not be effective. He did say that the 3 month ECB financing facility would last until the year end, at least;
As expected, he stated that renewing the SMP remained available, but adding nothing else. However, he seemed prepared to be willing to accept lower quality collateral from banks in exchange for funding, which will help a lot of peripheral banks;
He reiterated that the ESM could not technically lend to EZ banks directly at present, though added that the ESM policy objective could (read will) change. He understood that the ESM investing funds directly into banks would not result in higher debt to GDP for the relevant country, but questioned whether the ESM was set up to hold bank equity. I remain of the view that the ESM will recap banks directly, though only if the relevant country subjects itself to oversight/supervision ie Spain;
He proposed spending cuts rather than increased taxation to reduce budget deficits. In addition, he supported capex programmes - with the cheap money at present why not, though does not provide a short term fix;
Suggested that the EZ had time - well he had to say that, but in reality, Soros's 3 month deadline for the EZ to come up with a fix is right - indeed, you could argue that it is longer than the market will provide;
Overall, it was over you you EZ politicians. I'm (Draghi) just responsible for monetary issues and if you think you can abrogate your responsibility by forcing me to act, think again. In addition, the ECB has limits as to what it can do/deliver. Completely the right position. Having said that, in a crisis, the ECB will act - it will have no alternative.
All I can say is thank God we have Draghi around rather than that....... Trichet.
Markets have taken the news positively (not sure it was that positive, though, in my view !!!!) - expectations of movement from EZ politicians and from the ECB, in the near future, basically. Once again, its going to be a game of assessing market expectations, as opposed to the impact of likely policy measures that the EZ can deliver - TRICKY.
Kiron Sarkar
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