{"id":894,"date":"2012-02-13T14:00:00","date_gmt":"2012-02-13T14:00:00","guid":{"rendered":"http:\/\/starthostunlimiteddmffassi-ss.stackstaging.com\/bondworld.ch\/home\/sites\/20b\/7\/760c69a11c\/public_html\/investmentworld.ch\/index.php\/2012\/02\/13\/viewpoint-the-ecb-left-interest-rates-unchanged\/"},"modified":"2012-02-13T14:00:00","modified_gmt":"2012-02-13T14:00:00","slug":"viewpoint-the-ecb-left-interest-rates-unchanged","status":"publish","type":"post","link":"https:\/\/www.investmentworld.eu\/ch\/viewpoint-the-ecb-left-interest-rates-unchanged\/","title":{"rendered":"Viewpoint: The ECB left interest rates unchanged"},"content":{"rendered":"

<\/span><\/span>1) The ECB left interest rates unchanged (and did not debate the possibility of a cut, which means that chances of a reduction of the refi rate in the months ahead are slim). The change in collateral eligibility rules appears to be an additional measure….. <\/strong>
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For professional investors and advisers only<\/strong><\/p>\n

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(on top of the substantial ones already put in place) to counter the risk of a credit crunch and ease tensions on the financial markets. Lastly, it is still unclear what role the ECB will play in the deal to be closed on Greece, although the sale of GGBs to the EFSF at purchase price now seems to be a possibility. <\/p>\n

2) The Eurogroup has postponed to Wednesday, 15 February, a final decision on the granting of the new bailout package to Greece.<\/p>\n

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1) As widely expected, the ECB meeting came to a close leaving rates unchanged. <\/strong><\/p>\n

During the press conference, President Draghi added that the option of a cut was not discussed, letting on that chances of a refi rate cut in the months ahead are slim.<\/p>\n

MACRO <\/strong>SCENARIO \u2013 The assessment of the risks weighing on the macro scenario changed little compared to the January press release, although the tone is slightly less pessimistic. The ECB confirmed the existence of \u201cdownside risks\u201d (no longer defined as \u201csubstantial\u201d, however) in a still very uncertain context, while also confirming, based on greater evidence than a month ago, the \u201ctentative\u201d signs of a stabilisation in economic activity (albeit at modest levels) yielded both by surveys and real data; these signs were accompanied by easing stress on the financial markets (also thanks to the measures adopted by the ECB itself). In essence, after a \u201cvery weak\u201d fourth quarter, the cycle does not seem to have deteriorated further at the beginning of 2012, and the ECB scenario (on which we agree) points to a very gradual recovery in the course of the year. As regards inflation, Draghi confirmed that risks are<\/p>\n

balanced and that it will take the CPI several months to drop back in line with the target.<\/p>\n<\/p>\n

RULES ON COLLATERAL<\/strong> \u2013 Mr. Draghi confirmed the approval of new collateral eligibility criteria, announced on occasion of the 8 December meeting, for the seven National Central Banks that presented proposals in this direction (Ireland, Spain, France, Italy, Cyprus, Austria and Portugal), and that will allow the temporary acceptance of \u201cadditional credit claims\u201d as collateral in Eurosystem credit operations1. In essence, each of the NCBs involved will present (based on shared guidelines) specific national acceptance criteria for additional credits, that will have to be approved by the ECB\u2019s Governing Council. Detailed information on the specific national criteria are available on the websites of the respective NCBs2. Draghi acknowledged that these changes imply greater risk for the Eurosystemn, but stressed that such risk will be \u201cmanaged very well\u201d, with \u201cvery stringent\u201d conditions, that should reduce the amount of acceptable collateral by almost two-thirds (compared to the nominal value of total credits).<\/p>\n

The ECB will review the situation concerning collateral in six months. Draghi added that decision to change rules on collateral was taken to prevent risks on credit, especially in the countries hit hardest by the crisis, and to guarantee that monetary policy slackening transfers entirely to the economic cycle. The ECB President did admit, however, that the discussion on collateral was not unanimous within the Governing Council. The change is an important one: for Italian banks, the Bank of Italy estimates that additional collateral potentially eligible at around EUR 170Bn, or EUR 70Bn after application of risk control measures (at present, collateral offered as guarantee by Italian banks is worth around EUR 290Bn, of which only EUR 42Bn in bank loans).<\/p>\n

LTRO <\/strong>\u2013 Draghi, in addition to stressing (quite rightly so, in our opinion) the decisive role played by the introduction of the new three-year auctions in easing market tensions, said that the effects of the December auction \u201care still unfolding\u201d, and may not have been fully reflected, for instance, on the results of the latest BLS (which pointed to a sharp deterioration in credit conditions between the end of 2011 and early 2012). Denying rumours quoted by press agencies (last week\u2019s FT), and in line with our expectations, Draghi said he expected demand for funds at the next three-year LTRO at the end of February to be around the level (and not much higher) of the previous one (EUR 489Bn). On one hand, in fact, reputational risk, given the success of the first auction, seems not to apply, and the change in rules on collateral could push more banks to demand funds, but, on the other hand, we suspect banks\u2019 financing needs may not play a more significant role than they did last December, and the drop in shortterm yields that has already taken place may have cooled the pursuit of carry trades.<\/p>\n<\/p>\n

THE ROLE OF THE ECB IN THE GREEK DEAL <\/strong>\u2013 Draghi, in addition to confirming he had received confirmation from the Greek Prime Minster that an agreement had been reached on the additional austerity measures, and that the \u201cvibrations\u201d were that an agreement on PSI is also very close, avoided commenting on the role the ECB will play in the complex negotiations over Greece, leaving all decisions on the topic to the Eurogroup. Specifically, neither confirmed nor denied rumours seen in the press in recent days (WSJ and Kathimerini) based on which the ECB could take part in the deal by selling its GGB portfolio to the EFSF at purchase price. The difference between the discounted price at which the ECB purchased the bonds and their nominal value is estimated at around EUR 11-12Bn. On this topic, Draghi simply said that talk about the ECB sharing losses is \u201cunfounded\u201d, as this would in effect correspond to the monetary financing of a member state. However, this would not be so, and could therefore be accepted, if rather than share losses the ECB renounced profits, distributing them to member states in proportion to their contribution to ECB capital; the idea of a bond \u201cswap\u201d with the EFSF seems to fall into this latter category of options. Yet, it remains unclear how the EFSF\u2019s participation in a haircut of Greek debt would not violate the statutory prohibition against the monetary financing of member states. Draghi also added that any \u201clegal tricks on Greek bonds\u201d will be avoided. Lastly, Draghi said he considers the new \u201cfiscal compact\u201d as a major event, that should viewed as a first timid step towards a fiscal union, which remains the longterm objective.<\/p>\n

In brief: 1) the likeliest scenario now seems to include unchanged rates; 2) the change in collateral eligibility rules appears to be an additional measure (on top of the substantial ones already put in place) to effectively ease tensions on the markets; 3) it is still unclear what role the ECB will play in the deal on Greece, but the sale of GGBs to the EFSF at purchase price now seems to be a possibility.<\/p>\n

2) The extraordinary Eurogroup meeting came to an end without a final decision being taken. <\/strong><\/p>\n

The euro area Finance Ministers acknowledged the additional fiscal measures and the moves the Greek government intends to make to obtain granting of the second bailout package from official creditors, but demanded more tangible efforts. In the press conference that followed the meeting, president Juncker stressed that conditions are still not in place for the approval of the bailout package, and therefore in order for the funds to be issued: 1) the Greek parliament must approve (in all likeliness on Sunday) the package agreed with the Troika; 2) additional structural corrections worth EUR 325M must be \u201crapidly identified\u201d; 3) political party leaders must offer \u201cstrong political assurance\u201d guaranteeing implementation of the package, also considering the impending elections. Juncker made it clear that if these conditions are not met, the funds will not be issued. As regards PSI, Juncker said that the agreement is a necessary condition for the approval of the package, and that the Troika is still working on the debt sustainability analysis to assess whether the debt\/GDP ratio target of 120% of GDP by 2020 can effectively be reached. Based on the information available, Juncker called a meeting of the Eurogroup work group next Tuesday, and a new extraordinary Eurogroup meeting on Wednesday, 15 February: if the three missing conditions are, the issue of the funds will be approved and the national parliamentary procedures will be arranged.<\/p>\n<\/p><\/div>\n

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Appendix
<\/strong> <\/p>\n

Analyst Certification<\/strong>
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.<\/p>\n

Important Disclosures<\/strong>
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.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient\u2019s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
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Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (\u201cResearch Policy\u201d). The Research Policy is clearly explained in the relevant section of Banca IMI\u2019s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and\/or representatives and\/or employees and\/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and\/or sale, or offer to make a purchase and\/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and\/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
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Valuation Methodology<\/strong>
Trading Ideas are based on the market\u2019s expectations, investors\u2019 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<\/strong>
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\u2019s 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\u2019s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI\u2019s web site (www.bancaimi.com) or by contacting your sales representative.<\/p>\n

Source: BONDWorld – Intesa Sanpaolo \u2013 Research Department<\/p>\n","protected":false},"excerpt":{"rendered":"

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