Showing posts with label ECB SMP. Show all posts
Showing posts with label ECB SMP. Show all posts

Friday, August 3, 2012

3/8/2012: Did Draghi quietly score a policy coup d'etat?

Let me revisit yesterday's assessment of Mario Draghi's statements. With time passing, it is becoming clear that the key (only) tangible positive is Draghi's comment that he will focus on the shorter end of maturity curve and that this will be consistent with two things:

  1. No commitment to sterilization, and
  2. Commitment to targeting 'traditional monetary policy' objectives.
Let me explain why I now think these are significant game changers for ECB, and potentially, for euro area.

For some years, even before the financial crisis hit, the ECB (including Trichet before Draghi) have been focusing or attempting to focus policymakers' attention on the need for structural reforms. In the past this was accompanied with threats of tightening monetary policy. But now, such threats are clearly not credible. Hence, the ECB, to stay on the message that long-term structural reforms must be pursued needed to achieve the following objectives simultaneously:
  • Reduce immediate pressure on funding indebted and deficit-laden peripherals (so reduce short-term borrowing rates)
  • Increase long-term pressure on the peripherals to incentivise them pursue longer term reforms (so increase slope of the yield curve)
  • Potentially support enhanced transmission of lower short-term rates into real economy (so alleviate pressure from sterilization of SMP), and lastly
  • Reduce future problem of unwinding SMP-accumulated 'assets' off the ECB balancesheet
Now, what Draghi set out yesterday as a potential plan does appear to do all of the four things above. By focusing SMP on shorter term end of the yield curve, ECB will indeed lower shorter-term borrowing costs for Italy and Spain (3-5 year max maturity), while steepening 10 year instruments costs to discourage, relatively, longer term borrowings. This means Italy and Spain should get an added incentive - growing over time as overall maturity profile of their debt starts to shorten as well - to enact long-term reforms. At the same time, ECB will be buying (assuming it does go through with the threat) shorter-term instruments, implying that unwinding these assets will be a natural process of maturity. ECB will not commit to sacrificing long-term flexibility of its policy tools by expanding SMP on the longer end of the yield curve, thus reducing overall risks to the monetary policy in the future.

Some thoughts for the weekend, folks...

Thursday, August 2, 2012

2/8/2012: A hell of a non-event

After all the hype and the pomp of recent weeks, today's ECB council and Mario Draghi's subsequent pressie were anti-climatic. Nay, they were outright bizarre, given the 'priming' achieved over the last week. The timeline of the whole fiasco is below - for the fun of it taken off twitter (please note: no tweets affiliations provided due to the way the data was extracted, so apologies to all).

The headline conclusion is as follows:

Sig Draghi's 'Big Bang':

  1. ECB 'may' address the seniority issue of ECB over private holders of PSI bonds - an issue that should've addressed more than 3 months ago, 
  2. ECB 'might' buy some Spanish/Italian bonds but ECB won't tell how much or when, 
  3. It is up to 'Governments' to do something about all of this and apply to EFSF, but
  4. ECB will now 'plan modalities' like the rest of the EU has been planning over the last 3 years.

Outcomes:

  1. Draghi has managed to bid down Italian and Spanish bonds
  2. Draghi manages to further undermine his & ECB's credibility
  3. The idiots who bought into peripherals on foot of expectation Draghi was about to start buying them based on his July 26th speech should have seen it coming: Draghi: In the speech on July 26th in London, I made no reference to a bond-buying programme



*DJ Draghi: Govt Council May Consider Undertaking Further Non Standard Measures #wsjeuro
*DRAGHI SAYS INVESTOR CONCERNS ON SENIORITY WILL BE ADDRESSED
*DJ Draghi: Will Design Appropriate Modalities for Such Measures Over Coming Weeks #wsjeuro
*DRAGHI SAYS ECB MAY TAKE MEASURES TO ENSURE POLICY TRANSMISSION
*DRAGHI SAYS TENSIONS IN FINANCIAL MARKETS AMONG RISKS
*Markets rally Mario Draghi on comments about eurozone. IBEX and MIB up by around 2%
*Draghi: Governing council may undertake outright open market operations of a size adequate to reach its objective. But no firm commitments
*DJ Stoxx 600 Index Up 1% As Draghi Speaks #wsjeuro
*DJ Draghi: Inflation Likely to Decline Further in 2012, be Below 2% in 2013 #wsjeuro
*So is Draghi strategy to bid down IT+ESP bonds to buy them cheaper?
*Oh, the Italian 10-year yield just tightened several bps
*Draghi talked markets by 5%. Delivered a delay. Huge blow to credibility
*IBEX and MIB rally losing steam as ECB chief Mario Draghi statement continues
*FTSE goes from up 50 to Negative on Draghi NON comments
*DJ Draghi: Sees Significant Progress on Fiscal Consolidation in Recent Yrs #wsjeuro
*DRAGHI SAYS IMPORTANT FOR BANKS TO BOOST THEIR RESILIENCE. Yes. with all those epic earnings
*RT @EKourtali: aaand : Italian, Spanish 10-year yield spreads over German bunds reverse earlier tightening (tradeweb)
*WAAAAAAR RT @djfxtrader: #Germany's Bundesbank to DJ-WSJ: No comment on #ECB Council Decision
*DJ Stoxx 600 Index Slides Into The Red on Draghi Comments; Down 0.2% #wsjeuro
*The Market Rally Has Now Completely Vanished Amid Mario Draghi's Press Conference read.bi/N0Vn3x
*FTSE, DAX, CAC, MIB, IBEX now in negative territory as ECB boss Mario Draghi fails to deliver on eurozone action pledge
*Draghi: we have discussed possible reductions in interest rates, unanimous decision this wasn't the time #wsjeuro
*Press conference Mario Draghi: Introductory statement to the press conference via ECB PR bit.ly/Qzrdon
*Draghi: first thing is that govts have to go to the EFSF. As I've said several times the ECB cannot replace govts #wsjeuro
*LIVE: Draghi implies that seniority and EFSF/ESM measures have to happen before the ECB takes action. read.bi/Ncwtuj
*Draghi: ECB may undertake outright open market intervention of a size adequate to reach its objectives #wsjeuro
*"Many of the details [of seniority and EFSF use] will be worked out by the [ECB]" in the coming weeks. read.bi/NLo06l
*ITA +20bps SPA +10bps since Draghi started
*Draghi: the effort will be focused on the shorter part of the yield curve #wsjeuro
*"This effort is going to be focused on the shorter part of the yield curve...which will introduce discipline on the longer part." -Draghi
*DJ Draghi: This Effort is Very Different from Previous Bond-Buying Program #wsjeuro
*Markets not happy. CAC-40 turned negative having been up 1.2% earlier in #Draghi's press conference. #wsjeuro
*"I'm a little surprised by the amount of attention this received in recent press." -Draghi on saying no to ESM bank license. "Not up to us."
*The current design of the ESM does not allow to be recognized as a suitable counterparty. (for ECB repo) -Draghi
*Oh man the Spanish 10-year did not like that ESM remark. Nor Italy.
*Euro sinking like a stone. Down 200 pips since peak at start of press conference.
*SPANISH TWO-YEAR NOTE YIELD 14 BPS LOWER AT 4.80%
*Euro /Dollar breaks 1.2200
*Meanwhile... Italy Govt Bonds 10 Year Gross Yield 5.934%
*EURO EXTENDS DECLINE AGAINST YEN; WEAKENS 0.5% TO 95.42
*Markit iTraxx Europe already widened 5bps since start of Draghi speech - now at 159.5bps
*Draghi: You shouldn't assume we will or will not sterilize SMP purchases. The committees will have to tell us what is right.
*Draghi: Endorsement to do whatever it takes to preserve euro has been unanimous, but clear Mr Weidmann, BuBa have reservations #wsjeuro
*Spain CDS already 22bps wider at 560bps
*Spain's IBEX35 share index now down by almost 5% after ECB chief Mario Draghi failed to deliver on his eurozone action pledge.
*Italy Govt Bonds 10 Year Gross Yield 6.00%
*FTSE MIB -2.44%
*FTSE MIB -3.00% -- Italy Govt Bonds 10 Year Gross Yield 6.055% -- ITALY 10 - GERMANY 10 SPREAD 473bps
*IT GETS WORSE: US Futures sliding harder after Mario Draghi flop read.bi/NLpsFS
*Draghi: Even if we were ready to act now, there are not grounds to do so bit.ly/QzAPzq
*Italy Govt Bonds 10 Year Gross Yield 6.129%
*Spanish stock market has plunged 600 points in last few minutes, now down 5% pic.twitter.com/JHQZDAtl
*Draghi on whether ECB willing 2 buy private sector assets - "no reason to be specific on what other options are" - eh, left it open?
*DJ Draghi: Statement on Bond Buys Wasn't a Decision, it was Guidance #wsjeuro
*Draghi stresses bond-buying language: "MAY DECIDE" if conditions are met #wsjeuro
*Italy 10-Yr Erases Gains, Yield Rises 23bps to 6.16%
*EMU epitaph: "I want to stress the ECB remains the guardian of price stability and that remains its mandate." - Draghi.
*Bond market to Draghi: If you'd like to buy bonds, we'll make them cheaper for you... bit.ly/QzLfPG
*RT @edwardnh: Draghi has lost all credibility now. The ECB is going to do nothing. Watch yields rise.
*Draghi: it is pointless to go short the Euro. Well, if you went short the euro when Draghi started speaking you are up 200 pips
*Draghi: "It's pointless to go short on the euro because the euro will stay." The first point hardly implies the second.
*Trichet: "Speculating on Greece defaulting is a certain way of losing out" July 27, 2011. And then... bit.ly/NVWP6b
*FTSE MIB -3.17%
... and some more
*Spanish 10s hit 7% bit.ly/QA24Ks
*Priceless! RT @FGoria: S&P: Portugal 'BB/B' Ratings Affirmed; Outlook Remains Negative On Exposure To Spain