The president of the ECB, Mario Draghi, is discussing the rate cut just announced and also declared new measures to help banks: 2 three year LTROs, lower grade assets as collateral, and a cut in the reserve ratio. Anything to help banks in the current strain. EUR/USD rises but then turns back after Draghi answered NO to the question about bond buying.
Draghi also lowered forecasts, with a good chance of a recession in 2012. The rejection of bond buys and also of a circular IMF / EFSF solution sends EUR/USD even lower. “Must respect treaty”. EUR/USD losing support. Live updates from the press conference in this post.
See concise wrap of this very hectic event
Live Blog
13:00 GMT Pre-conference. EUR/USD is trading just under the 1.342o line at this time. All times are GMT. Press conference begins at 13:30.
13:04 Towards the EU Summit held tomorrow, there is a report about bringing forward the permanent bailout mechanism (ESM) from mid 2013 to 2012. Draghi will meet Merkel and Sarkozy later in the day, before the summit.
13:09 French president Sarkozy also talking now, saying that “Europe is in danger”. EUR/USD at 1.3410.
13:10 You can see the press conference live here.
13:13 Draghi cut rates in 2 out of 2 meetings, but the ECB still has a lot of ammunition.
13:20 A long night is expecting officials in Brussels. Will they deliver? EUR/USD will fall if not.
13:26 EUR/USD ticking up above 1.3420 just before the press conference begins.
13:29 Press conference begins
13:30 Draghi starts and discusses the rate cut. Inflation is expected to drop in the future. Financial tensions dampen the economic outlook.
13:31 Monetary expansion remains moderate.
13:32 Draghi announces non standard measures for bank liquidity: 2 longer term financing operations for 3 YEARS with exit after one year.
13:32 The LTRO begins later in the month.
13:32 Collateral rules lowered to lower level credit grade.
13:33 The national central banks will manage this. EUR/USD is higher, at 1.3440.
13:34 Reserve ratio has been lowered as well: discontinue fine tuning operations on last day of each maintenance.
13:35 Another technical measure to support money markets has been announced. EUR/USD crossing 1.3450. All in all, 4 measures were announced.
13:35 Moderation in global demand, balance sheet adjustment and debt crisis are causes of the current downturn.
13:36 Recession expected in 2012 – a significant downwards revision. EUR/USD dropping now.
13:37 Forecasts downgraded but growth expected to return somewhere in 2012.
13:39 Also inflation is expected to fall.
13:40 Draghi talks about the recent decisions made by the EU leaders and says that this is the pre-condition for returning to a normal environment.
13:44 Draghi talks about labor market reforms and send the ball to the court of the governments.
13:45 Questions begin: Is the door open for bond buys – Draghi says NO.
13:47 No QE on the agenda and the decision was not unanimous.
13:51 EUR/USD falls back to 1.34 after Draghi says no QE.
13:52 Regarding Italy, Draghi says it is an “important budget”, but more needs to be done.
13:53 Draghi talks about treaty changes and says that speed is necessary.
13:54 In the meantime, US jobless claims fell to 381K, an encouraging number.
13:55 What about the circular IMF / EFSF ideas for helping struggling countries? Draghi says: No financing to governments – Treaty spirit must be respected. EUR/USD falls to 1.3380.
13:58 Playing down bond buying weighs on euro.
13:59 Not a unanimous decision.
14:00 Are we in a Lehman moment? Governments should restore confidence. A breakup of the euro is far fetched.
14:02 A lot of the money released by the ECB returns to the ECB.
14:03 ECB liquidity actions fight the deleveraging process and come to prevent a freeze of money markets.
14:03 In Q1, 230 billion euros come to maturity.
14:04 “We can see if we can keep the banking system liquid” – scary.
14:05 Fiscal consolidation is unavoidable, otherwise debt would be unsustainable. EUR/USD at 1.3360 support line.
14:06 Structural reforms are essential to enhance competitiveness.
14:07 Why isn’t the ECB more like the Fed and to buy debt? Draghi sends the reporter to the treaty and to price stability. The spirit of Trichet is still with us…
14:08 Draghi talks about the Bundesbank, hinting no big bond buys – EUR/USD already at 1.3330.
14:10 One cannot channel money to bypass the treaty. EUR/USD falling.
14:12 Draghi will not attend all meetings.
14:13 ECB didn’t discuss capping bond yields.
14:14 EUR/USD digging deeper but meeting support at 1.3320. Regarding the EBA, the stress tests aren’t supposed to create credit tightening – to avoid reduction in lending.
14:15 The goal is to channel money to the real economy at these troubled times. Broader use of collateral is supposed to enable access to funding for smaller banks and smaller companies.
14:18 Draghi isn’t excited by the one time failure to fully sterilize the SMP. Indeed, it was fully drained in the following week.
14:19 Sterilization of bond buys is a pre-condition. Draghi is asked about how long this can last and says that technical complexities can arise in an infinite size of the SMP. Is the SMP going infinite?
14:20 “No matter the legal trick, we must remain credible”. EUR/USD dipped under 1.3320 and got back above this level.
14:22 Draghi avoided answering if 1% is the lowest interest rate available.
14:26 It’s important that the summit delivers progress. We should wish for common fiscal rules.
14:27 Imprudent to make contingency plans. We don’t discuss the treaty, “we usually respect the rules” – don’t discuss them.
14:28 The ECB can act for the EFSF – technical preparations should be made soon. It does not involve the balance sheet.
14:29 Draghi is whispered to by his colleagues.
14:30 Draghi says that the technical help to the EFSF is meant to erase the notion that the EFSF will never be alive.
13:31 Asked if the US and UK have a monetisation of debt and says that the ECB is working according to the treaty.
13:32 Press conference ends – Here is the wrap of this very hectic event
Background
The European Central Bank decided to cut the interest rate from 1.25% to 1%, as widely expected. Some though that the ECB would make a bigger cut to a new historic low. The euro moved up from 1.3380 to 1.3420 following the announcement at 12:45 GMT.
The ECB is expected to ease collateral rules for banks that want loans from the central banks, and to extend these loans to two or three years. See the ECB preview for more.
The current situation of the debt crisis, and especially Italy requires quicker action than politicians are providing. The ECB has the power to print unlimited amounts of money and lower yields, yet it has some legal limitations and fears of creating moral hazard.
The legal limitations could be bypassed using the IMF. A report floated earlier discussed a circular loan of €150, certainly not enough to satisfy markets.
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