Thursday, February 4, 2010


ECB Greece Not Likely To Affect Near Term ECB Decisions

• As expected the ECB did not change interest rates today (leaving the main rate at 1%) and did not present new details on its exit from non-standard measures. Mr. Trichet announced that the ECB will present the decision about the implementation of the next steps of the exit strategy in March.

•There are few changes in the press statement compared to January. The only obvious change is that the press statements did not include the phrase “given the ongoing parallel decline in money and credit growth” in order to illustrate the dampening impact of monetary conditions on medium-term inflation.

•In the press statement, the governing council acknowledged the ongoing diminishing in the tightening of lending standards by banks. But the ECB President said that it will be “extremely important” that banks do not constrain credit supply. In Mr. Trichet’s view, it is good that banks are making money again, but asked banks to use the profits to strengthen their balance sheets.

•The ECB again toughened the language regarding the need for fiscal consolidation by euro area member countries. In the press statement, the Council stated that “countries will be required to meet their commitments under the excessive deficit procedures”. In the Q&A session, questions on Greece and risks of a spillover to other countries dominated. Regarding Greece, Mr. Trichet welcomed this week’s announcement of additional fiscal tightening by the Greek government as a step in the right direction. He also welcomed the Greek government’s target to reduce the general-government deficit below 3% of GDP in 2013. But Mr. Trichet highlighted that Greece needs a medium-term strategy in order to meet its budget goal. In that respect, the ECB President emphasised that all member countries have substantial advantages in terms of their external funding facilities through being a member
of the monetary union.

•As expected, Mr. Trichet said that it is not the job of the ECB, but the member state governments and the Commission, to deal with the fiscal problems. While he said that there is a risk that loose fiscal policy can overburden monetary policy, he does not regard the current euro area average deficit-to-GDP rate of 6% as such an overburden. He highlighted that the euro area average deficit reading is below the readings in the US and Japan.

•Conclusion — As expected, the ECB provided little news regarding the next steps on the exit from the non-standard measures. However, as Mr. Trichet apparently does not regard the widening in spreads of Greek and other periphery bonds as a risk for euro area overall financing conditions, we expect that the ECB will implement the next measures soon. For March we expect that the ECB will announce an end to the unlimited funding facility – at least for a part of the open market operations – to become effective in April.
[Citibank Research]

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