The ECB has clearly changed tack on its role in the management of the crisis compared to last month However, since the governing council was taken aback by the worsening of the crisis in July, Draghi had few details to announce, except some general guidelines. The main piece of news is that government under pressure will enjoy combined support by the EFSF/ESM and by the ECB. No new measures on liquidity have been announced, but that could be done in the next weeks……….
No change in policy rates
The rate on the MROs remains at 0.75%, while the marginal lending and deposit rates stay at 1.50% and 0% respectively. No surprise here: the governing council had announced a rate cut just one month earlier. The cut of the deposit rate to zero has had little effect on the size of excess reserves, which have declined from about 780Bn to 747Bn, and has resulted merely in a shift from the deposit facility into current accounts: liquidity is not being lent by banks in Northern Europe to banks in Southern Europe. The next step could be the imposition of negative interest rates on the deposit facility, but that would have to be accompanied by limits on the current account balances (in the form of ceilings or of fees on the excess reserves). But even that may not suffice: as Draghi pointed out last week, “national supervisors, looking at the crisis, have asked their banks, the banks under their supervision, to withdraw their activities within national boundaries” and “they ring fenced liquidity positions so liquidity can’t flow”. Until this collective failure is corrected, the monetary authority has to step in.
A new Securities Markets Programme is forthcoming, but it will depend on the activation of a EFSF/ESM programme
Big news on this front.
Last week Draghi stated that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro”. He added that risk premia on sovereign borrowers “have to do more and more with convertibility, with the risk of convertibility. Now to the extent that these premia do not have to do with factors inherent to my counterparty – they come into our mandate. They come within our remit. To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate.” This marked a major turnaround with respect to his statement at the end of the July press conference.
Today, Draghi clarified that the “governing council may undertake outright open market operations of size adequate to reach its objective” and that “concern of private investors about seniority will be addressed”. The positive aspect is that the ECB president said that the size of bond buys needs to be adequate (i.e., he ceased to stress that the programme has to be limited in time and size), and that it is too early to say whether it will be sterilized. The Bundesbank seems to be the only NCB opposing such steps.
The negative aspect is that the modalities for such measures are not ready, they will be designed “over coming weeks”. Besides, activity will be focused on short-term maturities – which was a major drag for long-term BTPs today. Draghi has also clarified that there are two necessary conditions:
“governments must stand ready to activate the ESM/EFSF 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” and
governments under pressure ask first for EFSF/ESM support (which entails the signing of a formal commitment to fiscal consolidation and structural reform).
The facts that no facility is yet in place and that any action will be strictly linked to conditionality have disappointed market participants, but neither is surprising at all. The point is that a combined action by the EFSF/ESM and the ECB will be enough to deal with refinancing risk. A MoU could be good for Italy, too: a formal commitment would greatly reduce the risk posed by next year’s elections to the process of reform.
Measures to restore the transmission mechanism of monetary policy may be announced in coming months
For the moment, the ECB just states that “the governing council will consider further non-standard monetary policy measures according to what is required to repair monetary policy transmission.”
The ECB had already announced in late June an easing of its rules on collateral; full allotment on refinancing operations will remain in place until January at least, and a programme to buy covered bonds is being implemented (14.5Bn have been bought by the Eurosystem up to 1 August). With the unsecured market for liquidity still frozen and a wide divergence of credit conditions among member countries, there is the need for more action. Many options could be tried, including the purchase on the secondary market of bank and corporate bonds, programmes to buy commercial paper, a decrease in the haircuts on eligible collateral etc. We shall see.
Analyst Certification
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
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Valuation Methodology
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.
Source: BONDWorld – Intesa Sanpaolo – Research Department
Certificazione degli analisti
Gli analisti finanziari che hanno predisposto la presente ricerca, i cui nomi e ruoli sono riportati nella prima pagina del documento dichiarano che:
Le opinioni espresse sulle società citate nel documento riflettono accuratamente l’opinione personale, indipendente, equa ed equilibrata degli analisti;
Non è stato e non verrà ricevuto alcun compenso diretto o indiretto in cambio delle opinioni espresse.
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