The bazooka of the ECB will reach a trillion dollars. This is the amount of measures that the Eurotower has decided to deploy through the launch of the purchase of ABS and covered bonds. In today's highly anticipated press conference in Naples, where the ECB's governing council exceptionally met (which left rates unchanged at 0,05%), the president Mario Draghi lifted the veil on the details of the Asset purchase plan back securities (securities backed by assets, essentially securitizations on mortgages and corporate loans) and covered bonds announced at the last meeting.
"The potential of these two measures, the purchase of covered bonds and ABS, is around one trillion", said Draghi, specifying however that "this does not mean that we will reach this sum". Draghi explained that the measures taken take into account the fact that the medium and long-term inflation prospects have worsened and that the risks have increased.
PURCHASE OF ABS AND COVERED BOND IN THE FOURTH QUARTER
The ECB will start buying covered bonds from mid-October and ABS in the fourth quarter. The ABS purchases will not concern structured products but only simple and transparent securities and will also include those countries with 'junk' ratings below BBB- such as Greece and Cyprus, which are currently not eligible as collateral assets accepted by the ECB, albeit with some caveats that mitigate the risks.
The programs will have a duration of at least two years and are in addition to the TLTRO programme, i.e. the series of targeted longer-term refinancing operations which will be conducted until June 2016. These purchases will have a significant impact on the ECB balance sheet. Of course, these measures will unfold over a certain time horizon, but Draghi recalled that many things have been done since June and invited us to wait for the results.
"The groundwork to have a noticeable impact" has been done, he added, and "we expect all of this to have an impact on the medium-term inflation outlook, we'll see what the impact of those measures will be." Draghi wanted to reiterate that the ECB's policies are undertaken solely with the intention of guaranteeing price stability and bringing inflation back to 2%. Inflation, which is not measured with a single datum but with a wide range, is the only yardstick by which the ECB will measure any future moves.
“We will focus our action – he said – on the medium-term prospects for inflation in the months to come, not years to come”. The usual reassurance of these last meetings was not lacking: in saying that the euro is irreversible, Draghi reiterated several times in the conference that "the governing council is unanimous in taking other unconventional measures if necessary". On the other hand, the growth forecast remains modest. Indeed, the ECB believes there is a weakening of the recovery in the euro area.
And this is because the latest measures have already had effects, they have reduced rates close to zero and have had an effect on the foreign exchange market, but if "uncertainty has disappeared in the financial markets - said Draghi - it has not disappeared in the real markets" .
The ECB has brought rates to zero but now it is necessary for the banks to transfer these conditions to businesses and households. To revive bank lending "a return to an environment of confidence is necessary": "monetary policy can improve conditions" but there must be other conditions to stimulate investment and make households and businesses "ask banks for money". The banks must lend the funds received from the ECB to households and businesses, but for investments to resume, "confidence in the future" is needed: reforms must be accelerated - explained Draghi - reducing the tax burden, having certainty on the path of public finances, not only in Italy but in Europe as a whole”.
NO NEGOTIATIONS WITH STATES, EFFECTIVE MEASURES IF EVERYONE DOES THEIR OWN
In other words, the ECB is doing its part but a decisive contribution is needed from governments and the structural reforms of labor and product markets must "clearly accelerate". Draghi specified that there is no negotiation with states, "but we know that our measures will be effective only if combined with other policies, for example on demand, because the economic component is important, but to a large extent our problems are structural so we need of policies, including structural ones". And therefore: "It is not an exchange, we want to fulfill our mandate but each protagonist has a role to play".
In particular, Draghi underlined that the recovery was held back by unemployment and overcapacity and recommended that the States not frustrate the progress already achieved but proceed in line with the rules of the stability and growth pact. The "EU stability and growth pact - he explained - should remain the anchor of confidence" and the "flexibility allowed in the context of the rules should allow governments to meet the budgetary burdens for structural reforms, support demand and achieve a more growth-friendly fiscal policy mix”.
On France's anti-austerity declarations, Draghi recalled how French leaders, like the other Europeans, signed the recommendations at the July summit which envisage France's commitment to strengthen the 2014 budget and is awaiting the presentation of the draft finance law in October to pass judgment. “We are all interested – he said – in France returning to growth and reducing unemployment”.
While Draghi was speaking, the protests of the Block ECB protest movement were staged in Naples. "I understand the reasons for the protest" given "the weak situation of the Italian economy", replied Draghi, but if we look at the past "the fault of the crisis does not lie with the ECB: three years ago before the ECB intervention, the financial system was at collapse".
