Chillin' out till it needs to be funded
Draghi being a conformist, one can safely assume this is largely accepted opinion and may have a few twangs of policy action that need drect obsrvation from both S and Asia as with not enough to go around this is likely to be used subjectively in decision making as knowledge of money flows.
However, having said that it is much a minor opinion and not a destabilising factor in the scheme of things, a growing Asia hardly has anything more than growth and a consumer market to usurp “developed” Europe with a $15 tln GDP Asia’s links with European development Finance are already tenuous with 57% of IMF funds in Europe’s banking system and another trillion wished by the French in a completely partisan turn at the IMF last week.
The second most important takeaway from the Draghi address, and it is key results for Draghi and for the future of ECB monetary policy is his characterisation of the EUR 489 bln LTRO as welcomed by the economy yet not having reached credit markets back yet. Of Course Draghi is yet waiting for the credit marets to return with the EUR 489 bln, most of the banks are just waiting for the February expansion of the LTRO as the promised One Trillion makes it to the ESM in 2012 too(very close!) seen asa firewall for the overshooting of come bond yields that may endanger the system.
Apart from this Draghi shot the question of bonds having overcompensated for the risk in the markets, and reminded everyone of the overleverage that wrought the crisis out of shape, emphasising that fiscal consolidation defines itself with a small period of contraction and the need to “rebuild trust in the economies of the Euro area”
On what ECB did
(Two months ago) There was Eur 230 bln in bonds coming due this quarter plus refinancing needs of sovereigns which were also staggering. The senior unsecured bond market at the End of November was basically shut. the inter bank market was not working. Fear, Risk aversion and fear of regulators was paralysing the system and bringing the banking to a halt. We revisited the class of colalteral so that eligibility plus packaging did not lead to breakdown so medium banks could access refinancing facility not only large banks. Almost half a trillion was injected. After reimbursement of the short term facilities exactly 230 bln was left to cover the bonds to come due so we avoided a major major funding cruch, a major funding crisis. (the banks bidding behaviour also reflected the banks with larger bonds due buying more bonds) We halved the discount rate, and brought long term rates down too
The unsecured bond market has reopened, Baond issuance in the last 2-3 weeks are 2-3 times the issuance in the last 6 months combined.
On structural reform, Draghi ended with comparing the Euro to “even five months ago”:
The inflation target at below but close to 2% , is the only one but fairly wide objective for ECB by itself. ESM on the other hand intervenes with proper conditionality in the sovereign market to stabilise the soevreign market and aparticipate with IMF in reforms