Trevor Williams, chief economist, Lloyds, says that after Draghi’s comment bond yields are up almost 30 bps. Although the rate cut of 25 bps, which brings the ECB rates to a record low of 0.75%, is not satisfied to keep the markets satisfied. The markets are more worried after Draghi comment.
Q: The market was expecting non-standard measures but the ECB has refrained from announcing anything. Will this have any significant impact?
A: It has already impacted the markets. After Draghi’s comment the bond yields are up almost 30 bps. Although the rate cut of 25 bps, which brings the ECB rates to a record low of 0.75%, is not enough to keep the markets satisfied. The markets are more worried after Draghi’s comment.
Q: What is your view on Draghi’s comment and how do you see the road ahead? Draghi says, “we have always said that our non-standard measures are temporary and that we do not want to pre-commit about future decisions, but certainly now a few months have passed since we saw the LTRO and that credit flows are actually weak and remain weak.” How is the market interpreting this? How much time lag do you see before we see the ECB moving as far as non-standard measures are concerned?
A: Market is a term which captures the action of millions of people. The signals of the reaction to the non-action are clear more in terms of keeping yields low.
More so, in terms of keeping the yields low and that view is based on the assumption that the ECB would support measures to solve the problems of highly indebted economies in Europe, by monetizing the debt which they hold by the actions of the ECB in allowing the ESM as a vehicle for bowering, which is part of the recent agreement that it would be able to purchase bank debt without going through a sovereign which is a good news.
As it would reduce the burden on sovereign debt, but if the ECB as seems likely is unwilling to grant it a license to be able to borrow in the markets backed by the ECB, then that will reduce its ability to effectively print money.
So, that is the reason why the bond yields have backed up. They are clearly looking for non-standard measures like another LTRO, but this time Draghi seems unwilling to do that.
Q: Draghi mentioned that the recovery process will be very slow and gradual. What kind of recovery we are likely to see for the euro zone given the fact that measures have been announced?
A: Draghi meant that, the sure way to bring the debt pressures down and under control is to revive growth. If you have growth, then debt ratios will come down. The real job of the ECB and the government is to keep the growth growing and second is to stable or lower inflation in the long run.
Currently, the toughest task is to get the growth going; in some countries it involves structural reforms, which is time consuming. This year, the euro zone growth will fall by 0.6% and in next year we expect a growth of 0.5% in the euro zone. The biggest worry is that there is no significant recovery till 2014 for the euro zone.
Q: Yesterday, the IMF chief Christine Lagarde said that while fiscal consolidation is important, too much fiscal consolidation could harm the recovery that we are hoping for the euro zone. The commentary seems to be now moving pro-growth as opposed to pro-austerity?
A: Yes, correct. The language has changed. The reasons why the commentary around austerity was focused, because it was felt that in order to keep the confidence of financial markets that fund the government deficit in the short term, one need to tell them that we will bring these deficits under control. So, there is a focus on getting the deficits down, i.e austerity.
However, too much austerity implies that one needs to ask the question, where is the growth going to come from? Unfortunately, I think there is too much rhetoric around that. So, now the rhetoric has changed, but the underlying actions haven’t fundamentally changed.
(curtsey : money control)
Head Research Department