Brussels, 02/10/2014 (Agence Europe) - Following the meeting of its Governing Council in Naples, the European Central Bank (ECB) on Thursday 2 October clarified the details on the massive programme to buy back asset-back shares (ABS) and covered bonds.
This programme, of a duration of “at least two years” to run from mid-October, aims to “boost lending to SMEs”, said the president of the Frankfurt-based monetary institute, Mario Draghi. It will allow banks to lose from their financial statements mortgage and consumer loans entered into by non-financial players, which will be reconfigured in the form of financial securities, which the ECB will buy back. In this way, the banks, which carry out 80% of the financial intermediation in Europe, will be obliged to hold less own funds and will therefore be able to lend more to economic operators.
These securities must be “simple and transparent”, Draghi stressed. As regards the management of securities-related risks, he drew a parallel with the ABS securities which the Eurosystem accepts as guarantees (“collateral”) for its banking refinancing operations. “We will try to be as inclusive as possible but with caution”, Draghi said. To allow the programme to cover all of the eurozone, amongst other reasons, ABS securities and covered bonds from countries such as Greece and Cyprus, which are no longer eligible as collateral due to low credit ratings, will be subject to specific rules aiming to reduce the risks they bring with them. Among these conditions is an obligation on the countries where ABS securities and covered bonds are issued to be covered by a rescue plan.
The ABS and covered bonds buy-back programme completes the “TLTRO” massive targeted cash injection operation. These actions will have the effect of “substantially” growing the ECB's balance sheet, said Draghi, who declined to put an exact figure on the increase in the size of the balance sheet, which is expected to return to a level close to that of 2012. Experts are talking about an increase of €1000 billion.
Weak economy. Draghi noted a “weakening” in economic dynamism even though, in the medium term, prospects for a “moderate” recovery subsist. He argued that a greater factor on growth is represented by some of the downside risks, such as geopolitical tension on the doorstep of Europe, the reduced volume of lending to the economy by banks and the fact that the member states do not appear madly keen to carry out structural reforms. Given an economic situation marked by flat-line growth and excessively low inflation (0.3% in September, 0.4% in August, according to Eurostat), the Governing Council is standing by to use the conventional and extraordinary instruments available to the ECB to ensure that the medium-term inflation prospects remain anchored to a level close to, but less than, 2%.
The president of the ECB reiterated his firm belief that monetary policy alone cannot cure all of the ills of the eurozone. He said that its effect on financing the economy will be felt all the more as member states reform their economies to free up new sources of growth, in full respect of the rules of the stability and growth pact as an “anchor of stability”.
France. What is Draghi's assessment of France, which yesterday announced a 2015 draft budget which will postpone bringing public deficit under 3% of GDP until 2017 (see EUROPE 11167)? It is in everybody's interests for France to return to growth, he said, expressing his “confidence” in the French government's capacity to reform its economy. The announced reforms were drafted over a long period; “Now it's implementation time”, he stressed.
On Thursday, the Italian prime minister, Matteo Renzi, who is struggling to push through employment reform in his country, leapt to the defence of the French government, his political ally at European level. He is to host an extraordinary European summit on employment and growth, in Milan on Wednesday 8 October.
As for the anti-austerity demonstration held in Naples on the sidelines of the meeting of the Governing Council, Draghi argued that the euro, which is “irreversible”, was not the problem, but the solution. He listed the many measures already taken (rates at their lowest levels, massive cash injection, etc) to fight the low levels of inflation and, ultimately, to support the economy through the banking system. Whether or not they are in the eurozone, the states must reform their economies, said Draghi, who takes the view that the cost of these reforms will be higher for countries which do not use the single currency.
Rates unchanged. On Thursday, the ECB decided not to change the levels of its lending rates, following their surprise reduction in September (see EUROPE 11148). The rate of the principal refinancing operations therefore remains at +0.05%, and the marginal lending facility and the deposit facility at + 0.3% and -0.2% respectively. (MB)