Vijf vragen aan Mario Draghi

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Het besluit was al even genomen, maandag start de kwantitatieve verruiming van de Europese Centrale Bank (ECB). Oftewel het aanzetten van de geldpers, tegen deflatie.

European Central Bank policy makers meet in Cyprus today with investors expecting President Mario Draghi to flesh out details of the 1.1 trillion euro ($1.2 trillion) quantitative-easing plan he announced in January. Here are five questions traders are seeking answers to:

What will ECB-style QE look like?

When exactly this month the ECB will start buying sovereign bonds is front and center on investors’ minds.

Draghi will also have to tell investors how the central bank intends to carry them out -- directly or via reverse auctions. He may offer insight into how the ECB will calculate self-imposed limits of 25 percent of each bond issuance and 33 percent of any single country’s debt. He is likely to be asked how transparent the central bank will be in reporting what it bought.

Some of the information that Draghi is set to provide officially have surfaced in policy makers’ speeches in recent weeks. For example, Executive Board member Benoit Coeure said purchases will follow the maturity profile present in the market, in order to minimize distortions. To avoid ambiguity that may raise volatility in turn, Draghi will want to clarify these and other points before the ECB’s buying spree starts.

Will there be enough assets to buy?

Policy makers say they’re confident the ECB will have no trouble spending 60 billion euros a month, as announced.
Some investors and analysts are not so sanguine, with those at Nomura International Plc compiling the chart below to show how long the ECB could buy for under the current framework.

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“There have been growing concerns that the program could be too big for the bond market to absorb relative to net supply,” Frederik Ducrozet, an economist at Credit Agricole SA in Paris, wrote in a report to clients. “The ECB might have to be very aggressive with its purchases.”
Central banks in countries with small outstanding debt could soon run into the ceilings set by the ECB. Therefore, any hints on how those institutions can make up their quota, as well as debt of which European institutions and agencies is eligible, will be valuable.

How will the ECB evaluate QE success?

Draghi set a benchmark when he said QE would run through September 2016 or until the central bank sees “a sustained adjustment in the path of inflation” toward the ECB’s goal of just under 2 percent. The ECB President will be questioned on other indicators to judge progress.
A signal in this sense might come from new economic forecasts. In December, the ECB saw inflation at 1 percent this year and 1.5 percent in 2016. With QE now worked into the technical assumptions, revisions to the projections may be significant. A gauge for 2017 will be available for the first time.

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Will interest rates be tweaked?

Not a single economist polled by Bloomberg News predicts the ECB will change its interest rates. The main refinancing rate currently stands at 0.05 percent, the marginal rate at 0.3 percent and the deposit rate at minus 0.2 percent.
Central banks from Switzerland to Denmark have gone further. While both are using a deposit rate of minus 0.75 percent to stave off deposit inflows and currency appreciation, their bold steps beg the question whether the ECB has really reached the floor, and under which circumstances it could follow suit.

What about Greece?

Draghi will have to explain how he envisages to fund Greek banks. Ever since the ECB said after the victory of anti-bailout party Syriza in national elections that it would no longer accept Greek government debt as collateral, the country’s lenders have relied on emergency liquidity assistance.
Now that the government in Athens reached a deal to extend its aid program until the end of June, policy makers will have to decide whether they’re comfortable to reinstate a waiver that would allow banks to borrow money against junk-rated sovereign bonds, or whether they will prolong ELA support through the Greek central bank. The ECB will also have to take a stance on the government’s push to issue more short-term debt to cover financing needs in the coming months.

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