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Mario Draghi speaks on Europe, The Fiscal Compact and the ECB (Davos 2012)

English: EPP Congress Bonn: Podium discussion ...
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Now that you will not allow me to almost live blog the final verdict to the centuries of change that Mario Draghi spoke on, things become much more difficult for me to establsh and measure.. t already ounds like the Central Banker ) The first surprise to park on the crisis is that the policy framework assumes the global mbalances to have Asia’s savings to blame as a major counterbalancing feature. I would have thought despite the noise the fact that we operate on deficits and are sensitive to inflation rules out Japan being Asia esp as China and India emerge out from under the carpet, China the big brother miles away froma  saavings led deflation as it repatriates everything into real estate, a balanced portfolio of investments which havs much more equity than any other sovereign, and which have almost lost a Bank in BOC to exposure to European debt

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 Euro system is another world. There are a lot of done things and there is a lot of determination to do more things that will have to be delivered of course”
The expectations of further rate cuts expected to pressure Draghi did not seem to be in play unless Mario Draghi wants to lower Europe’s tolerance to deflation in a bad year.
ECB vs ESM

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

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