ECB's Draghi Announces Unorthodox Measures But Backs Away From 'The Bazooka'

The ECB is in the spotlight this morning as expectations were for the Mario Draghi to (a) cut rates, (b) dig into the toolbox to find ways to ease growing bank liquidity problems, and (c) provide some sort of hint that the ECB will begin playing a bigger role in the European sovereign debt crisis.

The ECB kicked things off this morning by cutting its benchmark interest rates by 25 basis points (0.25%) to 1.00%. This represented the second consecutive cut in rates and the move was in line with expectations.

However, the real key to today’s ECB event was the news conference hosted by Draghi. Speaking to reporters, the ECB President first stressed that the economic outlook for the EU area remains subject to “particular uncertainty” and that the risks are “high” to the downside.

In response to what Draghi called the twin threats of recession and deflation, the ECB announced that it would take further “unorthodox” measures. However, Draghi appears to have backed away this morning from the idea that the ECB will “fire its bazooka” with unlimited bond purchases to backstop sovereign debt.

The central bank announced that it will provide further liquidity measures in order to reduce market tension and ease funding for European banks. Although Draghi emphasized that all nonstandard measures would be temporary, the ECB said it would conduct two long-term refinancing operations at a fixed rate with a maturity of 36 months. In addition, the ECB said it would ease its collateral rules for financing by accepting single-A rated securities in exchange for loans.

Draghi told reporters, "The (new measures are) to ensure enhanced access for the banking sector to liquidity and facilitate the functioning of the euro area money market."

Markets initially liked what they heard from the press conference as U.S. futures quickly jumped higher.

However, Draghi then made remarks that appear to have poured cold water on the idea of the ECB getting more involved in the debt crisis (aka “firing the bazooka”).

Draghi first repeated that ECB bond buying was neither eternal nor infinite. This appears to be a direct response to expectations that the ECB would provide unlimited bond buying once a “fiscal compact” was created by the Eurozone countries. However, we will note that no such compact exists at the present time.

Mr. Draghi also denied that he had sent a signal to the markets that more bond purchases last week in a press conference following an interest rate decision.Reuters noted that ECB President Draghi said today that he was "surprised by the implicit meaning" that was given to his comments last week.

Draghi said government bond purchases in the secondary markets by the ECB are done for the purpose of improving the transmission of monetary policy and were "not infinite."

On the topic of the multiple rumors regarding the potential for the ECB to lend to the IMF, Draghi also appeared to dampen expectations. The ECB President said that the central bank is not a member of the IMF and that using the IMF as a channel for Eurozone financing is very complex from a legal standpoint.

Draghi went on to remind the room that the ECB is not allowed to provide financing to member states of the Eurozone.

In the political game of chess that is being played out in the Eurozone at the present time, we will suggest that Draghi’s comments appear to be about in line with expectations. Recall that there is no “fiscal compact” at this point in time as the EU summit has just begun.

However, stock traders do not appear to like what they’ve heard so far today as no hints were provided regarding any further actions and no carrots were offered to EU leaders.

Next up is the soap opera surrounding the EU summit. Be sure to stay tuned.

 

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