miércoles, 1 de agosto de 2012

miércoles, agosto 01, 2012


Markets Insight

July 31, 2012 3:19 pm

Time for something different from the ECB

By Ralph Atkins

 

Like a whodunit writer, Mario Draghi is good at building suspense and a “yikes, how will he solve this one?” sensation. In December, when the eurozone last faced meltdown, the European Central Bank president wrongfooted markets by providing unlimited three-year loans to the eurozone financial system: the pundits had expected a revamped government bond-buying programme.




Eight months later, the uplifting effects of the longer-term refinancing operations, which saw the ECB pump more than €1tn into banks, have faded. Last week, Spanish two-year bond yields at one point climbed above 7 per cent, a euro-era high.






A day later, Mr Draghi gave a strong hint that he was planning another twist in the eurozone debt crisis. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,” he told a London conference.






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Once again the ECB’s existing bond-buying instrument is unlikely to be his weapon of choice, at least in its current form. After taking over the ECB presidency in November, Mr Draghi concluded that the “securities markets programme” – launched in May 2010 by Jean-Claude Trichet, his predecessor – was seriously flawed. Although the ECB acquired €212bn in crisis-hit eurozone governments’ bonds, investors were far from overawed. Instead, opposition to the programme from Germany’s conservative Bundesbank called into question the ECB’s commitment to bringing down bond yields.






Almost as bad, in the eyes of ECB hardliners, the bank compromised its political independence by wheeling-and-dealing with eurozone governments. Exactly a year ago, the SMP was expanded significantly to include Italian and Spanish government debtonly for Silvio Berlusconi, Italy’s then prime minister, to renege on reform pledges secured by Mr Trichet.






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That experience explains why Mr Draghi in December opted instead for three-year LTROs; providing liquidity to banks against collateral was clearly the job of a central bank. The SMP was “neither eternal nor infinite”, the ECB president said then, making clear his aim of winding it down as soon as possible.






If the SMP were now reactivated for a limited period, investors would simply see a selling opportunity. Other events have further reduced its attractiveness. Earlier this year, the ECB gave itselfseniorstatus in bond markets by refusing to take part in a writedown of Greek government debt. That has created fears it would take priority in any future restructurings.






So, something different is required this time. One option being discussed would see the ECB acting alongside the European Financial Stability Facility – the European Union’s bailout fund – which would join sovereign debt market intervention after imposing conditions on governments. In other words, the EFSF would do the messy job of dealing with politicians. But the ECB, with its unlimited firepower, would still have to provide most of the muscle.






The ECB is responsible for the effective implementation of its monetary policy. But, with eurozone interest rates diverging so much, that is clearly not happening. Fears about banks’ funding had been eased by the LTROs, Mr Draghi said last week: “We took care of that” (though presumably further three-year LTROs are possible). Where the problem was a lack of capital, in contrast, there was little the ECB could do: governments would have to take responsibility.





But Mr Draghi identified another dimension being priced into crisis-hit governments’ bond yields: “convertibilityrisk, that of a possible eurozone break-up leading to redenomination into another, weaker currency.








The ECB president’s acknowledgment that catastrophic outcomes were being priced into the market could pave the way for a correspondingly bold response, such as an unequivocal ECB pledge to dowhatever it takes” to bring bond yields down, perhaps below a predetermined level or cap.





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Mr Draghi has left a lot of unanswered questions, however. Will the ECB overcome the “seniorityproblem of a revamped bond-buying programme by finally taking losses on its Greek bonds? How will he keep the Bundesbank on side, or at least prevent it undermining the credibility of any ECB intervention? Will it somehow try to distinguish between “convertibilitypremiums and other factors driving up bond yields?





The unscripted nature of his comments last weekahead of Thursday’s ECB policy decision – suggests Mr Draghi was trying to bounce some members of its governing council into backing a plan for which he had not yet secured sufficient support. Does that mean a decision could be delayed? Will politicians have to act first, for instance in dealing with Spain? Thursday’s meeting will be a nail-biter.






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Copyright The Financial Times Limited 2012.

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