ECB Statement

Mario Draghi’s introductory statement is here.  Parts of the following extract were re-read by Draghi in response to some predictable questions early in the press conference.

The Governing Council extensively discussed the policy options to address the severe malfunctioning in the price formation process in the bond markets of euro area countries. Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.

In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination. As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines.

The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures.

32 replies on “ECB Statement”

THE MARKETS ARE UP!!!
…the markets are down….

THE MARKETS ARE UP!!!
…the markets are down….

I’m doing an economy.

Once again Draghi does not do it.

This might usefully be wound into Kevin O’Rourke’s post “The collapse in trust in the EU and its institutions” as it illustrates two key reasons for the (entirely justified) collapse in trust in European Institutions.

The first is the fantastical far right economic flavour to official statements:

In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination.

This piece of supply side doggerel could have straight out of the CDU press office (and perhaps it did). No one on the left of the political spectrum (and we have not gone away you know) can have faith in an EU that attempts to address a huge and ongoing market failure by destroying everything else to save it. Risk premia were too low before and too high now so the answer has to be, you guessed it, stronger determination and better signalling. This does not even reach the level of nonsense.

The second issue is that the EU and its institutions have been revealed as essentially useless, and perhaps worse than useless, in dealing with the European component of the global financial crisis.

The parts of the EU that are in trouble find their policy options reduced to the ones that benefit the countries not in trouble (Germany and philosophical fellow travellers). Since the interests of Germany and the peripheral states are essentially opposed the EU now works against us. Even though Ireland may be able to recover from the bondholder bailout and the crushing of domestic demand our relationship with the EU has to be revised in light of this.

Perhaps in the next few weeks Draghi will beat some minimal support of the GIPSIs out of the ECB but no one can be under any illusion that the EU now functions in the best interests of its peoples. The various EU institutions, the financial sector and Germany are vying for power and none of these parties have any real interest in the recovery of the peripheral countries except as in it furthers their own power.

I would not be as negative about the Draghi conference as others seem to be.
In effect he said, countries that believe their bond rates are too high, must follow a procedure to get the ECB to intervene. They must apply to the EFSF or ESM. Then the ECB ‘may’ intervene.
So apply.

Critically, the did mention ‘votes’ on the intervention measures and the fact that there was a dissenting member in their decision., presumably Germany.
It looks like Germany will not win all the battles from now on.

@ JR

your take on the ECB is a very neat and succinct summary. Too many people expecting Draghi to literally hit the print button this afternoon. The ECB has taken some very significant decisions today, which will take some weeks or months to be implemented. But Weidmann has ended today as a lone dissenter, and potentially an isolated one (even from his own Bundesbank colleague, Asmussen).

We’ll see!

Short-term movements in markets can be irrational — a few unplanned movements yesterday on the NYSE cost one firm $440m.

A glitch didn’t do as much damage as nice Mr Bayne (not to be confused with Mitt Bain).

Draghi certainly can help but central banks can only do so much.

One out of seven Americans are on food stamps.

“As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready….”

I think Karl Whelan has hit the nail on the head…something has to be done in the intervening period when the thickos just aren’t going to get how good things really are.

Its like the line from The Shining when Delbert Grady meets Jack Torrance and says “When my wife tried to prevent me from doing my duty, I CORRECTED her, sir”

The ECB will have to keep the markets CORRECTED until the vision of success becomes more certain…thereafter presumably we can trust them to CORRECT themselves again.

Leaving aside the ham-fisted intervention of the head of the Bundesbank, one wonders if in this instance the creditor countries may not happen to be right? In the middle of the holiday season and a thin market, now was hardly the time for giving the impression of being scared by the markets.

In any case, the job of central banks is to keep them guessing. Whether he intended to or not, Draghi has succeeded in this.

Another probable unintended consequence is that it should be clear by now that a major struggle is going on between the nations involved and the outcome can only be some form of compromise. One side is not going to allow itself to be bounced by the other.

@DOCM
“…the job of central banks is to keep them guessing. Whether he intended to or not, Draghi has succeeded in this.”

Not so sure I agree with that job spec…keeping them guessing is hardly the recipe for price stability….but not sure you meant it in that context.

@ V Barrett

I meant it in the context that if a central bank acts as some market operators anticipate, it is a sure-fire way for the latter to make money.

Incidentally, the internal German politics of the recent events are also worth considering. For example, the SPD has come out – prior to the ECB meeting – in opposition to renewed bond buying by the ECB arguing, correctly in my view, that such action would provide only temporary respite. In any case, it makes little sense for a central bank to load down its balance sheet with only doubtful bonds.

DOCM,

How do you propose the non programme Peripherals fund themselves in the short to medium term without access to capital markets and with little cash on hand. In the absence of a reverse tap from the E**** these countries have lost market access.

The core is now either goverened by idiots or else they have a cunning plan which is to force the periphery out of the single currency. My bet is on the latter. Then they will use their own resources to bail out their own financial sytem. The sooner this bluff is called the better.

IT main headline on todays developments:

“ECB gearing up to buy euro zone bonds, Draghi says”

There is certainly a bias towards postive spin in the IT’s reporting on the crisis. The Euro fell over 2.5 cents against the dollar in the aftermath of Draghis conference. That is an enormous plunge by any standards and would certainly confuse anyone looking for headlines to explain dramatic market movements. Surely:

“Euro plunges despite Draghi’s claims that ECB to buy euro zone bonds”

…who have been a much more nuetral and accurate representation of todays developments.

It’s clear from the press conference that a new bond-buying program is going ahead that differs from the previous one with the EFSF buying in the primary market following the agreement of governments.

Draghi said that the ECB was willing to “undertake outright market operations of a size adequate to reach its objective,” adding that details of related ECB action would be worked out “in the coming weeks.”

Instead of focusing on the short term twists and turns of ECB policy, I would advise everyone to think about the long term outcome of ECB policy.

I simply look at the development of nominal GDP for the whole Euro Area: 9244 bn in 2008, 9413 bn in 2011. Thus, 2% cumulated growth over 3 years. By any standard, I regard this as a catastrophic development. As a reminder, nominal GDP is linked to monetary policy through the quantity equation of money: Q x P = M x V, with Q x P being nominal GDP.

The Euro Area simply has a catastrophic monetary policy since 2008, and the whole public debt crisis is largely a consequence of that.

There is a nonsense to this:
The Euro is irreversible does not match with “do as your told or you won’t get funds”.
Because any withholding of funds from a non-compliant Euro country leads to a reversing of the Euro in that country

@ TMD

I do not think this to be the case at all. What is at issue is finding a basis of agreement between the opposing sides. It must result in a quid pro quo from the weaker one (which it takes little effort to identify). It seems to me that Draghi has wriggled out of a difficult situation with a classic piece of interim negotiation involving the major capitals (two not even in the EA). MH puts the point effectively above.

Apart from Greece, none of the exposed countries is in immediate danger of running out of cash as far as I am aware.

I agree, however, that it is a game of chicken and either side, or both, may go over the cliff unexpectedly. But I doubt it.

How the situation plays out internally in Germany also seems to me to be the aspect that needs to be watched. It is nothing short of extraordinary that a constutional court would demand a delay to consider its verdict and then announce a fixed date (12 September) on which it will give its decision.

An ironic aspect is the fact that the question that the German constitutional court has consistantly failed to address, as to where the dividing lines lies between its prerogatives and those of the ECJ, notably in relation to the EFSF and the ESM, has been implicitly answered by the recent decision of the Irish Supreme Court to identify those issues on which it has a clear responsibility and to refer the rest – the plaintiff’s case, essentiallly, lock, stock and barrel – to the ECJ.

Steady on folks. If Draghi now has a 16 to 1 majority on the Governing Council, the game has changed.

FYI

08/02/2012

Draghi on the Markets
ECB Disappoints Investors with No Euro Action

Investors had been hoping for a clear signal from Mario Draghi that the European Central Bank was ready to take action to prop up the euro. But in his press conference following the ECB monthly meeting on Thursday, all he offered was more promises. Markets plunged as a result.
…
Furthermore, a final decision on the ESM’s participation in bond purchases is not likely to be made before the middle of next month, when European leaders are set to gather once again. And Germany remains opposed to both prongs of Draghi’s attack. Germany’s central bank, the Bundesbank, has been particularly wary of the bond-buying program, which has already resulted in €211 billion worth of shaky bonds on the ECB’s books. Bundesbank head Jens Weidmann is concerned that the program rewards countries without requiring them to take any consolidation measures in return.
…
German Opposition

Indeed, several parliamentarians from her center-right Christian Democrats (CDU) criticized the plan on Thursday. Wolfgang Bosbach, a notorious skeptic of efforts to save the euro, said that “the problem is constantly climbing sovereign debt” in an interview with German public broadcaster ARD. “If we take away the pressure provided by high interest rates, then the willingness to make needed reforms disappears as well,” he added.

Hans Michelbach, the senior conservative member of the German parliament’s Finance Committee, demanded in an interview with the financial daily Handelsblatt that the ECB be explicitly forbidden from buying sovereign bonds on the secondary market. “The central bank under the leadership of Mario Draghi has pursued increasingly adventuresome contortions to get around the prohibition against state financing,” he told the paper.

Alexander Dobrindt, general secretary of the Christian Social Union, the Bavarian sister party to Merkel’s CDU, likewise criticized Draghi’s idea. “If the ECB buys sovereign bonds, it would be akin to state financing through the back door. The ECB would be leaving the path of monetary stability,” he told the mass-circulation daily Bild.

The influential tabloid also launched a campaign of its own to convince Draghi not to pursue his bond-purchasing plans. Earlier this year, the paper gave the ECB president a Prussian spiked helmet from 1871 to encourage him to impose Prussian-style discipline on the central bank. In an article on Thursday, however, the paper wrote: “Even more ECB billions for indebted countries? Then Bild wants its helmet back!”

http://www.spiegel.de/international/europe/ecb-head-mario-draghi-disappoints-markets-with-euro-plan-a-847895.html

@cmcc
16 to 1 would be emphatic if all “animals were equal”…but we know this not to be the case and the 1 is what it’s all about. The begging bowl is getting bigger but its the same patron that is required to fill. That will only happen, if at all, with massive strings attached. There will be no debate in this country as to whether the seismic shift this will represent is what we really want in return for a few dollars more…we will wait till the last moment before being presented with a fait accompli.

So when you say the game has changed I think you ought acknowledge that if indeed you are right and it has, it will almost certaintly have implications for the long term governance of this state.

DEREK SCALLY in Frankfurt

Spain and Italy face renewed pressure to accept euro zone bailouts after European Central Bank president Mario Draghi made this a precondition of bond market intervention to drive down their borrowing costs.
…

Meanwhile, Mr Draghi dismissed as “incorrect” a report in Der Spiegel that he asked ECB governors to consider a solution to Ireland’s banking debt issue that went beyond a “purely legal discussion”.
…
In a second setback for euro zone crisis countries, Mr Draghi said it was legally impossible for the European Stability Mechanism bailout fund to be granted a banking licence in its current form, allowing it to tap the ECB for potentially unlimited financing. “It is not up to us to give a banking licence to the ESM, it is up to governments,” he said. […]

“It’s clear and it’s known that the Bundesbank have their reservations about the programme of buying bonds,” said Mr Draghi.

http://www.irishtimes.com/newspaper/breaking/2012/0803/breaking1.html

CmcC,
If the council voted n to 1 in favour of Draghi does that mean that Asmussen also supports Draghi. Are the Germans split?

@ Tull

yes, reports from German newspapers that Asmussen tried to find a compromise between Draghi and Weidmann, was unable to, and plumped for Draghi

@ All

as per popular (mis)perception, Draghi screwed up royally yesterday, and doomed the single currency to the depths of hell…

Hold on, whaddya mean Italian 2yr yields are 40bps lower and 5yr is 25bps lower? No, that doesnt fit with my editorial bias at all…

The addition of ‘conditionality’ to the bond purchas process is designed to placate German politicos and allow Angela and Wolfgang to sell it locally notwithstanding the expected opposition from FDP and members of her own CDU/Bavarian coalition. If all other EZ politicos come on side then Herr Weidmann can be finessed. Could also lead to early general election in Germany if the loose cannon in the FDP (and a few other fundamentalists act on Nein) which might me no bad thing.

Asmussen is a pragmatist and signals suggest that he is also in favour of a ‘reasonable deal’ on Hibernia’s odious financial system debt.

@BEB

If the be all and end all is marginal reduction in short term yields then fine. The headlines this morning of spain and italy being pushed into bailouts “or else”….should be the longer term concern for us all in terms of the implicaitons this entails.

@DOD
Placating german politicos must ultimately be extended to placating the German electorate. Who is going to finesse them into buying into the ‘siesmic’ shift in the new euro order without some serious concessions from the indebted nations that will have to go far beyond the fiscal treaty.

@V barrett

German citizenry will be provided with choice in the upcoming REFERENDUM.

@DOD
well this is a good point you raise…if a referendum is required to ratify the ESM treaty then to what extent, if any will that have on the machinations of the ESM. If all that is still up for grabs than a lot more placating will have to take place beyond any such referendum.

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