Did ECB’s Hansson Talk out of Turn?

Ardo Hansson is the Chicago-born
Governor of the central bank of Estonia. 
He was interviewed by Market
New today.   He seemed to say that barring a surprise; the ECB can end the asset purchases next
September.  


Recall that last month the ECB indicated it would continue to extend its purchases through the first nine months of
next year, albeit at half the current 60 bln euros a month pace.  It
specifically chose not to provide a hard end-date.
  This seemed to be somewhat controversial as
some (the usual representatives from creditor nations suspected) wanted an
official end date.  Leaving aside the merits of extending or not, we think
that tactically it would have been a mistake to draw a line when it was not
necessary.  We suspect that investors could have reacted differently and
counter to the desire of
officials.  


Hansson was quoted saying the asset purchases will likely end in
September, provided the economy evolves broadly in line the ECB forecasts,
including an uptick in inflation.
  Hansson argued that stopping
purchases entirely must be one of the options that the ECB will consider. 
Can there really be any doubt that
Hansson or another official will propose ending the purchases?  They
probably would have preferred a six-month extension rather than
nine.  


The key issue is not whether it is an option, but will it be supported by a majority.  Of course, the much
depends on the evolution of prices and the regional economy more broadly. 
However, what many might not realize yet, as it may not be found on many calendars is that in the middle of next year,
European banks can begin repaying without penalty the funds borrowed in the
ECB’s Targeted Long-Term Repo Operation (TLTRO).  


The paying back of the funds, since the extra liquidity is costly with
negative deposit rates and negative short-term rates, the ECB’s balance sheet
may be shrinking when it begins deciding what to do in September. 
This may seem like a premature tightening of
financial conditions to many ECB officials.    Such a reduction in
the ECB’s balance sheet may spur the central bank to gradually taper the 30 bln
euros monthly purchases to allow a more gradual end to the purchases.
   


We suspect that there will be another battle before deciding what to do
with the asset purchases which seems likely to be made before next summer
recess.
  The ECB seemed to resist calling the reduction of asset
purchases as tapering because its extraordinary policies are much more than
just the balance sheet.  The ECB’s monetary policy includes the negative
40 bp deposit rate, refi operations that are
fully allotted at zero interest rate, and relaxing some of its credit
quality standards.  


In terms of sequencing, the ECB has
made it clear through its forward guidance that it will not boost rates until
sometime after the purchases end.
  This
is the same sequence the Fed and BOE adopted.  It is not clear, though,
what are the conditions that will allow the central bank to return competitive
refi operations, for example.  


Also, it seems that ECB President Draghi may come under scrutiny during
the run-up to Italian elections that must
be held by the end of May 2018.
 
Last month, Bank of Italy Governor (and Draghi’s successor) Visco was embroiled
in what seemed to be pre-election jockeying.  It looked as if he was going
to be replaced at the of his term as
there was an attempt to place the blame on Visco for the banking woes. 
Many of the problems, of course, pre-date Visco and that is how Draghi may be dragged into Italian politics.  


Recall that before Draghi was the Governor the Bank of Italy, he worked
for a US investment bank and reportedly helped some Italian governments to use
derivative contracts to minimize the appearance of debt levels.
 
Reports suggest that during his tenure at the central bank, officials knew that
Monte dei Paschi, for example, had used a
complex transaction to conceal the loss of the equivalent of roughly $500
mln–two years before prosecutors were informed.    There are
legalistic issues, of the power of the central bank, and the improper actions
by former executives since 2008.  





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