As expected, the ECB has dismissed all speculations on possible deposit rate cuts or an early unwinding of the EAPP…..
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Intesa Sanpaolo – Research Department For professional investors and advisers only
Greece: mounting disillusionment as the Eurogroup meeting of 24 April approaches, with no evidence of negotiations progressing.
As we expected, following the April ECB meeting Draghi said that speculation on the tapering of the EAPP are entirely premature, and ruled out any possibility of a deposit rate cut. Otherwise, the April meeting of the ECB Governing Council was markedly interlocutory.
The ECB’s statement reasserts that EAPP “purchases are intended to run at least until the end of September 2016 and in any case until we see a sustained adjustment in the path of inflation that is consistent with our aim of achieving inflation rates below but close to 2% over the medium term”. Compared to last March, the statement adds that, in its assessment of the measures put in place, the Governing Council will focus on the trend of inflation “in the medium period”. Draghi stressed the use of the word “intended” rather than “expected”, adding that he is “surprised by the attention that a possible early exit of the programme receives” at a stage at which the programme has just started.
For what concerns the difficulties in implementing the programme, tied to the assumption of a scarcity of outstanding bonds, and on the reluctance of banks to sell, due to liquidity limits, Draghi said these worries are excessive. In response to criticism that the negative interest rate regime could destabilise the financial system, Draghi said that “so far we have not seen evidence” of serious risks to financial stability tied to imbalances on the market, nor in particular as a result of negative government bond yields”. He also added that, in any case, the fits line of defence is the use of “macro-prudential instruments” by the national authorities, a position the ECB had already taken in the past via statements made by Vice President Constancio. Draghi stressed that the existence of financial bubbles is preceded by an increase in financial leverage and by a sharp acceleration in bank loans, of which there is no sign for the time being.
As expected, many questions on Greece were asked, focusing in particular on the extent to which the ECB may further extend ELA. Draghi said that the answer is entirely in the hands of the Greek government and on the advancement of negotiations. In principle, no date has been set to halt the extension of ELA, and the central bank will continue “extending liquidity to the Greek banks while they are solvent and they have adequate collateral”. During the press conference, Draghi said that haircuts on collateral accepted by the ECB on Greek sovereign debt on ELA were mentioned, should conditions warrant a change in the current schedule, but that for the time being these are preliminary assessments. The Council will come back to the issue in due time.
At the moment, no swift solution is on the horizon for the Greek crisis. All the parties are sticking firmly to their positions, with the result that by now no-one believes the Eurogroup meeting of 24 April may prove decisive. Nor do the statements made by Prime Minister Tsipras and reported by Reuters on Thursday, blaming the deadlock on “political disagreements, not technical issues”, allow for optimism. Tsipras is counting on a last-minute step back by the Eurogroup, which however is showing no sign of intending to renounce conditionality, and aims to achieve an overarching deal covering the medium-long run. There are rumours that Athens may win a few weeks of financial autonomy by forcing all public agencies to lend liquidity to the Treasury by means of repos and by putting off the payment of bills to suppliers, although it is not clear if this will be enough to cover the debt repayments due to the IMF in May. The secondary public debt market already prices in a very high probability of default, placing 2Y yields at 25.6%, with a negative slope of the 2-10Y segment of the curve by 13 per cent. On the other hand, although an endemic deposit outflow from the banking system is ongoing, local savers do not seem to be giving in to panic. Should this happen, the crisis could precipitate even before the government fails to honour payment of any loan tranches.
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