Europe in the words of Mr. Draghi…
0On the ECB continuing to support the sovereigns through SMP bond purchases:
I’ve said many times what the SMP’s purpose is; it is to reactivate the transmission of monetary policy. The SMP is neither eternal nor infinite. We have a treaty; it states that our primary mandate is to maintain price stability. It also says no monetary financing. I’m old enough to remember that when this treaty was
written, some of the countries were … financing the government expenditures by money creation, and the consequences were really in front of all of us… That’s why this treaty is in the best tradition of the Bundesbank…Any central bank is constrained by its institutional set-up. In the US, the primary mandate
of the Fed is completely different from ours, and so is the Bank of England’s.
On channeling money through the IMF:
It’s legally complex. The spirit of the treaty is that one cannot channel money in a way to circumvent the treaty provisions. The key thing is that we should not try to circumvent the spirit of the treaty no matter what the legal trick is. What matters for the people and what matters for the confidence and the credibility of the institution is this spirit. If the national central banks want to lend to the IMF and the IMF wants to lend to Indonesia or China, that is fine; if they wanted to lend exclusively to Europe, we think it would be
incompatible with the treaty. Let’s not forget that the ECB is not an IMF member… more generally, the mechanism by which money is being channeled to the European countries should not obscure the fact that we have a treaty that says no monetary financing to governments.
On the ELAs accepting any collateral that the ECB cannot:
National central banks will be allowed, as a temporary solution, to accept as collateral additional performing credit claims (namely bank loans) that satisfy specific eligibility criteria. The responsibility entailed in the acceptance of such credit claims will be borne by the national central bank authorizing their use. These measures will take effect as soon as the relevant legal acts have been published.
On expectations that that more aggressive ECB action would be available in exchange for a greater commitment by the peripheral governments to fiscal austerity:
A new fiscal compact, comprising a fundamental restatement of the fiscal rules together with the fiscal commitments that euro area governments have made is the most important precondition for restoring the
normal functioning of financial markets.” The ECB has an important role, as the guardian of stability … what is happening is a redesign of the fiscal agreement in a way that would enhance, rebuild confidence in the euro area. We have our own ideas, views, and we have collaborated but the ultimate decisions
are in the hands of the leaders. We shouldn’t refrain from wishing for great progress toward common fiscal rules, controlling, ex ante, budgetary legislation. I wish all our leaders the best, and the ECB is here … But that doesn’t mean the ECB will respond, by the way.
On economic and financial conditions in Euroland:
The deposit facility is not far from where it was after Lehman … we are observing a delevering process that is now very significant. All of these elements can be explained by saying there are funding pressures, pressures to raise capital ratios. Our moves today are aimed at those funding pressures … these should
give confidence and certainty. Fiscal consolidation is unavoidable, because otherwise the situation is unsustainable. There isn’t much of a choice. It is true that fiscal consolidations are contractionary. The question is what could offset this pressure. One channel is confidence. This confidence-enhancing
effect depends on … progress towards a fiscal compact … and structural reform. [The ECB] foresees annual real GDP growth between -0.4% and 1.0% in 2012 …These [significant downward] revisions mainly reflect the impact on domestic demand of weaker confidence and worsening financing conditions, stemming from the heightened uncertainty related to the sovereign debt crisis.
On the potential breakup of the euro:
I think that in the end what matters are facts, not a negative psychology that is self-fulfilling. If we make substantial progress in the establishment of a new EU contract, we will see confidence return, and what seems to be a spiral of negative confidence will stop. A breakup … seems quite far-fetched…
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
