Central Banks

Thursday, August 2, 2012 - 12:35

Analysts Highlight Markets' Doubts About ECB Draghi's Pledges

PARIS (MNI) - "Disappointing" was the common theme of many analysts' reaction to ECB President Mario Draghi's press conference Thursday, at which conditions were laid out for eventual bond market intervention to lower borrowing costs in countries facing market pressure.

Taking their cue from initially negative market reactions, many analysts argued that Draghi had not delivered on his pledge that the ECB would do "enough" to protect the Eurozone from implosion, that details on the size and timing of any intervention were lacking and that conditionality could prove counter-productive.

Peripheral bond yields rose, stock prices fell and the euro slipped to a one-week low. Spain's 10-year bond yield, which fell to a low of 6.61% before Draghi began to speak, rose to 7.03% by the end of the press conference. Italian 10-year yields, which had declined to 5.73%, ended the day at 6.22%. Spain and Italy equity markets each lost about 3%.

Yet some analysts were more positive, arguing that Draghi had opened the door to a further cut in interest rates and that the conditions posed for government bond purchases were necessary to maintain the pressure on politicians for necessary reforms.

Following are excerpts of analysts' comments:

MARIO GRUPPE, Norddeutsche Landesbank: "Draghi's remarks today were disappointing. After his forceful remarks last week he did not follow up with the expected action and the markets reacted accordingly. Given that, it helped little that he made a vow of fidelity to the euro towards the end of the press conference. In the end, this was all quite wishy-washy today."

JEAN CHRISTOPHE CAFFET, Natixis: "Today's announcements by the ECB are not good news for sovereign bond markets and could therefore exacerbate market tensions in the short term. The ECB is clearly buying time and is still pushing EU governments to activate the EFSF... which is a rather dangerous game as Spain and Italy will probably favour ECB interventions as any EFSF support is backed by further fiscal conditionality. The Securities Markets Program may however be reactivated in the very short term. The fact that the ECB said it will focus on short-dated bonds could trigger further curve steepening in Spain and Italy."

KEN WATTRET, BNP Paribas: "The markets' response to the press conference is very negative, which is no surprise on the basis of the failure to live-up to the comments made by Mr Draghi in London a week ago. The bar had been well and truly raised and the ECB has under-delivered....The conditionality is key. So the governments have to request the assistance to set the wheels in motion. The worse the adverse reaction in markets, the more likely the politics will fall into place. The problem is, of course, the stress in markets and ongoing uncertainty in between times. The ECB could have sweetened the pill of no action on debt purchases today with a few other initiatives but opted not to. This is compounding the sense of disappointment. There was a reference in the Q&A to other things the ECB could do, including LTROs, collateral requirement changes etc, and a hint towards something coming in September. On policy rates, there was a comment in the Q&A to it "not being the time" for further action. This suggests that our call of a move in September holds together, for the refi rate at least, in tandem with the new staff projections."

VIOLA JULIEN, HELABA: "The expectations in the run-up to the press conference were extremely high so that Draghi actually had to disappoint them. Market participants almost believed in a massive intervention of the ECB. Obviously, the remarks by Draghi then weren't enough for most of them, which you could also see in the reactions of the markets. It was too vague, it simply lacked details."

CARSTEN BRZESKI, ING: "The ECB did not deliver the big bazooka some market participants had hoped for....Clearly, today's press conference was a cold shower for these expectations. The ECB did not present any new measures. In fact, ECB President Draghi stressed the well-known ECB stance that monetary policy could not solve the Eurozone debt crisis....However, Draghi's comments also made clear that the ECB will not leave Eurozone governments standing alone in the rain. How? The ECB implicitly announced an SMP 2.0....It is obvious that the ECB will stick to a principle of strict conditionality. Unlimited bond purchases, therefore, look highly unlikely. However, combining conditionality to a measure which is officially meant to tackle problems with monetary policy transmission sounds somewhat contradictory. What do we make of all of this? One, a rate cut at the September meeting looks highly possible. Two, the ECB will not engage in any ground-breaking measures like unlimited bond purchases. Three, ECB liquidity access for the ESM is out of the question right now but has not entirely been ruled out if the structure and tasks of the ESM have changed. Four, the ECB will stick to a principle of conditionality. For governments this means that they can only expect some ECB support if they send an official request to the EFSF/ESM."

GARETH ANDERSON, RBS: "It was a strong message but couched in what had been the standard line up until last week." Draghi made clear the ECB "will not get in front of politicians. They will respect conditionality. It's an uncomfortable message to give to the market, but I think it's a rational, sustainable message." Draghi did signal "there is a real commitment there to act, and [is] opening the door to some things that had seemed closed," regarding issues of seniority, non-sterilized asset purchases. "Reading between the lines of where they could end up, I thought there was a positive message there."

CHRISTEL ARANDA-HASSEL, Credit Suisse: "It obviously was somewhat disappointing that nothing was going to happen imminently. At the same time, the ECB is committed toward getting yield levels at least in the periphery countries back to a more sustainable level, at least in the short end. The other big, big important bit is that they are going to address the seniority issue. If we were hoping yet again for the big bazooka, that was not delivered. The ESM is not getting a banking license or anything along those lines for the time being. The market always wants to see things happening ASAP, but Draghi is firmly, firmly leaving the ball in the court of the politicians. Therefore, things are not going to happen necessarily imminently. Then again, they don't have to. Spain at least will not come back to the market until next month."

JOERG KRAEMER, Commerzbank: "At today's meeting the ECB disappointed those who had hoped for the Big Bertha to fire immediately. Instead, the ECB wants the problem countries to first turn to the EFSF/ESM bailout fund. Only then the ECB is prepared to resume government bond purchases. Furthermore, ECB president Draghi said the ECB is against lending to the ESM. We, however, do not rule out that the peripheral countries in the end succeed to give the ESM access to ECB money. Furthermore, we continue to expect that the ECB cuts rates early next month. Overall, we feel comfortable with our bearish EUR-USD forecast."

RAINER SARTORIS, HSBC Trinkaus: "The markets have been disappointed by Draghi's remarks. They had simply hoped that the ECB would announce directly today that they will start a bond purchasing program. Still, the ECB has not shut the door on bond purchases. To the contrary, it has opened it very wide. In the end, I think the ECB is doing the right thing in demanding that governments should be on board. That is the message of the ECB: 'We are ready, we want to help, but we are not willing to carry the responsibility alone.'"

HUW PILL, Goldman Sachs: "In the end, today's much anticipated ECB Governing Council meeting failed to deliver the clarity, immediacy and decisiveness of action that some had hoped for. Nonetheless, we see the announcements made as in the right direction: the ECB has declared a willingness to mobilise its balance sheet to underpin the euro and maintain monetary policy transmission, but only under conditions that push governments to pursue the necessary fundamental changes required to make the euro area workable over the medium term.

MARCO VALLI, UniCredit: "Amazingly, apparently, the ECB will now identify the specific conditions for other governing groups' actions before it will contemplate interventions to restore the transmission mechanism of monetary policy....But will this new regime then potentially allow yields to move into, say, double-digit territory for a while, and maybe force a default on a country? Or will it be an effective negotiating instrument with which the EFSF (and de facto the ECB) sets policy conditionality? Or will it all be a fig leaf for interventions if markets become even more dysfunctional, but political reality in a country prevents further policy measures? Where does today's statement differ from Draghi's speech last week? Only in as much as the ECB has now started to identify what 'within its mandate' means. But we, for one, had never dreamt that this would have to be specified via committee work etc, rather than judgment calls. It seems to us that the ECB has left more questions than answers on the table."

--Paris newsroom, +331 4271 5540; Email: ssandelius@marketnews.com

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