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Wednesday, May 1

1st May - Special: ECB Watch

A collection of articles I've linked to previously, from latest to older. This post will be updated as the events unfold. Previous ECB Watch here.

Last update 15:00 GMT 3-May

Live coverage of the ECB’s interest rate decisionFT

Live Blog: ECB Rate Decision WSJ

Monetary policy decisions ECB

Refinancing rate decreased by 25 basis points to 0.50%

Marginal lending facility rate decreased by 50 basis points to 1.00%

Deposit facility unchanged at 0.00%.


The Evolution of the ECB’s Thinking on Negative Deposit RatesEconoMonitor

ECB acted, cutting two rates that don’t really matter much. The ECB opened up two more doors today, though it hasn’t walked through them: first on securitization of SME loans into ABS, and second, to lower their deposit rate to negative levels

Central Bank Alchemy and more NegativityMacro Man
Looking at negative deposit rates “with an open mind”? This has prompted TMM to go back to thinking about the if/how/why/whether they will be implemented. In this respect, a speech by Benoît Cœuré in February 2012 seems especially applicable
ECB rate cut: Does it mean anything?TradingFloor
In this video debate Mads Koefoed, Head of Macro Strategy, Saxo Bank and Steen Jakobsen, Chief Economist, Saxo Bank debate the significance of the European Central Bank's rate cut yesterday.

Here's what Draghi meant when he said the ECB would "cope"TradingFloor
Nick Beecroft: ECB President Mario Draghi and his fellow Governing Council members are pulling on their walking boots for a trip into unexplored territory: namely, negative interest rates.

Nowotny on Draghi and negative rates: “purple monkey dishwasher”alphaville / FT
It is more likely that the ECB is encouraging moderate euro weakness on the view that it will do no harm, and perhaps a little good, but not on the view that the weakness can substitute for domestic demand.


Introductory statement to the press conferenceECB

EUR Erases ECB Gains, Yen Does Its Own ThingZH

ECB "Technically Ready" To Ask Depositors To Pay Banks For Holding Their MoneyZH

ECB cuts rates and has an open mindNordea
More liquidity but no immediate help to SMEs * ECB stand ready to act even after today’s cut * Conclusion – delivering something but not what it wanted

ECB Rate Cut Avoids a Tricky Problem – For NowWSJ
By cutting its benchmark refinancing rate by a quarter of a percentage point to 0.5% today, while leaving its deposit rate unchanged at zero, the ECB has avoided a problem that could yet loom in future: can its deposit rate be reduced below zero?...“Negative deposit rates may come but only after the euro-zone banks have reduced their excess reserves significantly further,” said Valentin Marinov, strategist at Citigroup , in a research note.

Draghi Open to Negative Deposit Rate Trumps Rate Cut to Drive Euro LowerMarc to Market

EUR Erases ECB Gains, Yen Does Its Own ThingZH

ECB "Technically Ready" To Ask Depositors To Pay Banks For Holding Their MoneyZH

ECB cuts rates and has an open mindNordea
More liquidity but no immediate help to SMEs * ECB stand ready to act even after today’s cut * Conclusion – delivering something but not what it wanted

Shock and AweMish’s
ECB Prepared to "Cope With Consequences of Negative Deposit Rates"; Dancing in the Dark Experiment

99 Draghi trial balloons [updated] alphaville / FT
Draghi presser involved the ECB chief mentioning a heap of possible actions — from getting the “dead” ABS market going to help SMEs, through to negative interest rates, while giving a little bit of forward guidance on policy — but without committing to anything concrete.

Five Takeaways From the ECBWSJ
Benchmark Interest Rate Cut, Deposit Rate Kept at Zero, Reductions Reflect Economic Weakness, Dissension in the Ranks?, More to Come?

Draghi’s Presser Wasn’t a Crowd-PleaserWSJ
The ECB’s interest rate cuts provided the euro with some impetus to rise Thursday, but  a lack of further crowd-pleasing stimulus measures from President Mario Draghi at his press conference after the decision quickly saw those gains eroded.

Does Draghi Want a Lower Euro?WSJ
Perhaps the threat of negative deposit rates is Draghi’s way of addressing those atrocious “fundamentals” with one instrument he can definitely influence–the value of the euro–without actually mentioning the currency at all.

Rate cuts but nothing moreTradingFloor
Juhani Huopainen: The ECB cut its rates as expected. The EUR weakened, but only after negative rates were mentioned.

Welcome to the zero lower bound, Europe. We’ve been waiting for you!Wonkblog / WP
It is clear that there is a strong current of thought on the ECB’s governing council that they will need to do significantly more to ease policy, and soon.

The ECB’s Draghi sets out a new European economic paradigmCredit Writedowns
On monetary policy, I do not expect further cuts here. And I think the ECB is going to remain fairly cautious about policy unless a crisis erupts. So, I would expect the ECB to give greater clarity on the ABS program. And if the ECB is daring and the economy deteriorates further, I would also expect the ECB to start moving toward more explicitly anchoring other interest rate expectations instead of just the fixed-rate full allotment.

Draghi changes his mind on negative ratesDanske Bank (pdf)
There were no new measures targeting SMEs and Draghi said, ‘we are far from reaching any conclusion’. So, it seems an instrument for SMEs will not be announced any time soon. We still think that there will eventually be an announcement at one of the forthcoming Governing Council meetings.


Live Blog: ECB Rate DecisionWSJ

ECB does the expected… - alphaville / FT

ECB's Record Low Interest Rate Is Negative For The.... DollarZH

Monetary policy decisionsECB
Refinancing rate decreased by 25 basis points to 0.50%
Marginal lending facility rate decreased by 50 basis points to 1.00%
Deposit facility unchanged at 0.00%.

Ze price stabilityalphaville / FT
Deutsche’s George Saravelos:  a refi-rate cut by the ECB on Thursday will be fairly insignificant — but that the risk of disinflation in the eurozone, and how the ECB responds to this threat to ‘ze price stability’ matters: “The risks around the ECB primary mandate will likely return front and centre however, making the last two years a poor blueprint for judging how the ECB reacts”.

ECB Day and other DevelopmentsMarc to Market
Why the ECB may prefer to wait for June: The ECB's views dictate that the initial response to easier fiscal policies should not be easier monetary policy... The conventional view is that the problem with the transmission mechanism of monetary policy is with the credit to small and medium sized businesses. This is really the focus of the ECB, judging from the number of different officials have cited concerns. Yet the ECB does not seem ready quite yet to unveil a new initiative.

[video] RANsquawk ECB Rate Decision PreviewZH

ECB rate decisions and stock market reactionsTradingFloor
Peter Garnry: If history is any guidance and ignores that we only have three historical observations, no change in ECB's main refinancing rate would be best for European equities. The reality is we have no means to predict how equity markets will react today.

Will he or won't he? The market awaits Super MarioTradingFloor
Ken Veksler: I retain my stance that almost irrespective of what the ECB does and what Super Mario has to say in the ensuing press conference, the EURUSD will trade lower and revert back into its recent pivot of 1.3000, with 1.2950 being the key level below.

An ECB Rate Cut: What the Banks ThinkWSJ

ECB increasingly likely to cut ratesOpen Europe
... but running short of tools to help the eurozone economy

Why the ECB is expected to cut interest ratesMarketWatch
A rate cut may have only a limited impact on the real economy of the euro zone, but the European Central Bank’s governing council will most likely still opt for one on Thursday.

ECB to signal intent with rate cutTradingFloor

Mads Koefoed: Expected to cut its refinancing (refi) rate later today by 25 basis ponts (bps) to 0.50 percent in a display of action while it considers more effective tools.

ECB better ease or else – EURUSD set for 1.3000 test againTradingFloor

John J Hardy: Euro looks set to weaken just about any way I can slice it in the wake of today’s ECB meeting, but how and against which currencies is the key question. Meanwhile, AUD is pushing at key support.
Why I think the ECB is not about to cut the MRO rate Place du Luxembourg
The ECB believes that the channel of monetary policy transmission is still broken and that unless it is fixed monetary policy is not able to lift the Euro-Zone economy. The data also seems to imply that banks’ reliance on ECB liquidity has decreased considerably, so that the direct effect of a EONIA cut is very limited.

[simple text] The ECB and the riddle of the marketsBBC
Probably the biggest surprise of 2013 so far has been the dogged optimism of the financial markets. When the economic news is good, share prices rise. But when the news is bad, they often seem to go up as well.

ECB poised to act … modestlyMacroScope / Reuters
In terms of reviving the euro zone economy this is pea shooter and elephant territory. The ECB has consistently diagnosed the key problem that already ultra-low interest rates are not transmitted to high debt corners of the euro zone, where lending rates are much higher and credit restricted. A rate cut won’t change that. It also illuminates the gulf in approach with the Bank of Japan and Federal Reserve who continue to print money at a furious rate

ECB Preview: Rate cut and unconventional measures?TradingFloor
Juhani Huopainen: Consensus is split on the ECB cutting the refi rate from 0.75 to 0.5 percent. It is possible but would have limited effect on the credit crunch, unless it signals that something else is coming - and soon. Look for opportunities to short the EURUSD.

Low Euro-area inflation – good news or bad?Nordea
The Euro-area flash estimate for inflation in April fell to 1.2%! This follows a reading of 1.7% in March and we have looked a bit deeper into a few questions.

What the ECB can and cannot do to heal the eurozone Gavyn Davies / FT
To be clear, I am not arguing that the adoption of forward guidance or QE by the ECB is currently on the horizon. It is not. Nor can it be done without creating dissent and difficulties inside the Governing Council. There are sensible arguments against. What I am arguing, however, is that in the absence of such measures the ECB will soon be out of ammunition, and the markets should be aware of that.

Investors may be fooling themselves about an ECB rate cutQuartz

Expect ECB to Cut Rates on Friday; Even a "Shock-and-Awe" Cut Won't Help One BitMish’s

What to Expect From the ECBCFR
I’d like to think that the ECB will surprise us tomorrow with a package that includes both a rate cut and measures to increase the flow of credit to the periphery.

The ECB’s options, chartedalphaville / FT

Macro Digest: ECB will cut by 25 bps - but nothing will happenTradingFloor
Steen Jakobsen: For now, the ECB will praise itself for getting peripheral rates down and again adding: Over to you, politicians – we have done our job, now it’s up to you.

Markets Think They’ve Spotted a Rare Breed of Rate CutWSJ
Lower rates a ‘done deal’ after this week’s news of weakening inflation and unemployment...but…11 of the 25 interest rate changes there have been in the last 10 years were implemented in months when the governing council received revised economic forecasts from the ECB’s staff or those of the euro system as a whole…The next ECB staff projections won’t see daylight until June.

ECB’s Mario Draghi faces narrowing options as economy stagnatesFT

Rate cut (ineffective), forward guidance (not very effective), easing collateral requirements (would help banks but not necessarily increase lending), buying up bundles of SME loans (most effective, but difficult to design correctly and increases the central bank’s risks)
The credit matrixalphaville / FT
For one, banks can’t lend if they can’t find borrowers — although it might be unfair to blame borrowers who are seeing unappealing terms — and for two, central banks have poured a fair amount of liquidity out there with more available on tap. Morgan Stanley and UBS discuss possible solutions.

Negative interest rates – the Danish experienceNordea (pdf)
The ECB faces mounting pressure to ease monetary policy in the Euro area. In our view, this leaves the ECB with four options: 1) keep the powder dry and hope for the best: unchanged rates (60%), 2) the safe choice: narrowing the interest rate corridor by lowering the refi rate, while keeping the deposit rate unchanged (30%), 3) unknown territory: lowering both the deposit and lending rates, in the process slashing the deposit rate to below zero (5%), 4) All in one: launching new unconventional monetary policy measures while at the same time cutting rates (5%)

ECB Rate Cut May Not Be a Done DealWSJ

Which way for the ECB?Bruegel
Ahead of the ECB meeting, the debate on the right course for euro area macroeconomic policies has re-emerged. An interesting new feature of the debate is about differentiating monetary policy to better cater for different conditions in different countries of the euro area. So should there be more differentiation of monetary policy across countries and how much can monetary policy achieve?

Draghi will act to avoid deflationary spiralSober Look´
The ECB will have no choice but to ease policy and possibly prepare for more drastic actions. The Eurozone is facing a growing risk of deflation - similar to Japan. Once the inflation rate fell below 1% in Japan, the external shock of the Asian currency crisis (late 90s) sent Japan into a deflationary spiral.

ECB Preview: Draghi very likely to cut againDanske Bank (pdf)
We think a rate cut is very likely on Thursday and expect Mario Draghi to cut the refi rate to 0.50
%. A deposit rate cut is very unlikely, in our view. The ECB might present an instrument targeting lending to SMEs. The ECB is likely to work in tandem with other institutions on this. The market is already pricing in an ECB refi rate cut and therefore there is a risk the ECB could disappoint

ECB gears up for rate cut, likely this weekReuters

European Depositors Don’t Take Fright from CyprusMarc to Market
At the end of last week, the ECB reported that bailing in of Cypriot depositors did not scare other euro zone depositors. In fact, the ECB noted that deposits rose in March across the region, including in countries that have been suggested as potential candidates for the next aid package,

ECB preview: No rate cutNordea
We stick to our call and find it most likely that the ECB will keep rates on hold and instead come up with new measures to support bank lending to Small and Medium-sized Enterprises (SMEs).

Bundesbank declares ‘war’ on Mario Draghi’s bond bail-out at Germany’s top courtThe Telegraph

Research Bulletin No. 18ECB (pdf)
Heterogeneous transmission mechanism and the credit channel in the euro area * Firms’ adjustment during times of crisis * Macroeconomic effets of large-scale asset purchase programs

Euro-Area Economic Confidence Falls More Than Forecast – BB
Economic mood in euro zone sours again in April – Reuters
German Inflation Rate Plunges to Lowest in More Than Two Years – BB

Euro Area Savings Rate Drops To Record Low, Disposable Income Has Biggest Drop Ever – ZH

Business investment rate down to 19.7% in the euro area – Eurostat (pdf)
Tax-to-GDP ratio in the EU27 up to 38.8% in 2011 – Eurostat (pdf)
Household saving rate down to 12.2% in the euro area – Eurostat (pdf)

Yanis Varoufakis: Intransigent Bundesbanknaked capitalism
Mr. Jens Weidmann’s surreptitious campaign to bring back the (Greater) Deutsche Mark: On 12th June, 2013, Germany’s constitutional court is scheduled to rule on the legality of Mr Mario Draghi’s OMT

This chart shows how difficult Mario Draghi’s job isWonkblog / WP
Different countries within the euro zone are in vastly different economic situations, and ECB head Mario Draghi will have a hard time satisfying everyone:

Calling on the ECB to ActEsoltas
I did a series of three posts making the case for the European Central Bank to ease monetary policy. I figured I would post them all together on my personal blog rather than separately.

Europe's Fragmentation Offers Little Hope For Rate Cut "Real" GainsZH
Not only did M3 come out well below expectations at 2.6% YoY (vs 3% Exp.) but loans to the private sector remain drastically in the red. The fragmentation across the individual nations is dramatic…

Conflict of interest (rates): clamour for ECB rate cut grows but Germany remains waryOpen Europe
The wave of voices calling for some ECB action is growing, particularly given the wider debate on austerity. It will be tricky to balance this with the demands of the northern countries.

March 2013: Monetary developments in the euro area – ECB (pdf)
Quarterly Bank Lending Survey – ECB (pdf)
Mmm Mmm Mmm Mmm – alphaville / FT
Ray of light in Euro-zone credit numbers – Nordea

Beware the BundesbankMacroSope / Reuters
German newspaper Handelsblatt has got hold of a confidential Bundesbank report to Germany’s constitutional court, which sharply criticized the European Central Bank’s bond-buying plan. This could be very big or it could be nothing.

Market euphoria misreads the signals from Brussels and RomeAnatole Kaletsky / Reuters
So much, then, for the silly idea in Europe that “bad news is good news” because economic weakness will force the ECB to cut rates.

Pain Trades: A Discussion of Two TroikasMarc to Market
Given the push back against austerity, the ECB may not want to send a signal that could be interpreted as endorsing the relaxation of fiscal discipline…The once united Troika appears to be fracturing, leaving the ECB as the last defender of the austerity agenda.

Euro Slides On Goldman European Forecast CutZH

Vítor Constâncio: Fragmentation and rebalancing in the euro areaECB
(slides from the presentation)

Merkel: ECB would have to raise rates if looking at Germany onlyReuters

With the ECB easing inevitable, periphery yields hit new lowsSober Look

ECB says ditching austerity would not help euro zoneReuters
ECB policymakers rebuffed suggestions that Europe should ease up on austerity and said that while the central bank has room to cut interest rates, such a move would not necessarily help the economy much.

The Frankfurt vetoFree exchange / The Economist
Soaring borrowing costs apparently weren't about indebtedness at all, but about uncertainty over the ECB's willingness to act as lender of last resort. That, of course, means that any pivot away from fiscal consolidation in the euro area will require approval from Frankfurt…

Annual Report 2012ECB (pdf)

ECB poised to cut rates to help recession-hit euro zoneReuters
The ECB is closer to lowering interest rates than at any time since it last cut them in July 2012 and is likely to shave a quarter-point off at its policy meeting next week.

ECB Rate Cut Seen Next Week by Banks From Nomura to RBSBB
The ECB will cut its key interest rate to a record low next week as the euro- region economy slumps, according to banks including Nomura, UBS and RBS.

Results of the April 2013 euro area bank lending surveyECB

Ifo: German business optimism fades – TradingFloor
German business gloom grows as export markets wobble – Reuters
German Ifo Sentiment Fell After Winter Chilled Recovery: Economy – BB
IFO deterioration within expectationsTradingFloor

Today’s PMIs will not prompt a rate cutNordea
We believe the ECB sees additional interest rate cuts beyond the current level as more or less ineffective. That is the reason, in our view, that interest rates were not cut already in December. However, key figures have surprised to the downside and we believe the ECB will have to act if the bank believes the economic outlook has weakened further or if it is unable to come up with an SME “support package” even though the ECB believes the effect will be limited.

European PMIs finally bad enough for ECB to act?TradingFloor
After the PMI numbers in March I wrote that the numbers were not bad enough. I think today’s numbers however fit the bill and are bad enough. These numbers might just be bad enough to push the ECB into action.

Want to know what the ECB is going to do? Watch the German PMI – MacroScope / Reuters
Flash PMI – alphaville / FT
Euro zone slump moderates but German worries appear – Reuters
Euro-Area April Manufacturing, Services Contract – BB

How can the ECB fight fragmentation of the eurozone?Gavyn Davies / FT

Speech Draghi: Hearing before the Plenary of the European ParliamentECB

More on peripheral painFree exchange / The Economist
…the main reason the single currency is at risk is that the core, and the ECB, are subjecting the union to patterns of nominal growth it simply can't be expected to endure.

Rising deflation risks in the EurozoneResearch Ahead

Draghi urges governments to solve debt crisis, says ECB cannotReuters
Draghi on Monday put pressure on governments to push ahead with plans for closer European integration to address the euro zone crisis' core problems.

German ghost of inflations past haunting European stability: PosenMacroScope / Reuters
What did the former UK Monetary Policy Committee member mean? Quite simply, that the types of structural economic changes that Germany has been pushing on the euro zone are not only destructive but also bound to fail, at least if history is any guide.

The non-puzzle of peripheral painFree exchange / The Economist
And so the euro area might just choose to lock up bits of euros here and there and selectively reduce their value. That is what happened to many of the euros locked up in loans to the Greek government. And it is what happened to many of the euros that were sitting in insured deposits in Cypriot banks. Who knows where it might happen next! (Nowhere, say euro-area officials, entirely unconvincingly.) The rub is that doing something like that on the scale necessary to end the crisis probably, basically, more-or-less means the end of the euro area.

Why euro zone bond yield ‘convergence’ may be something to fearMacroScope / Reuters
In normal circumstances, this might suggest markets are no longer discriminating between the risks associated with different member countries’ bonds. But analysts say the recent convergence is based on a precarious belief of ECB action rather than any real improvement in economic fundamentals.

The role of monetary policy in addressing the crisis in the euro areaECB
Speech by Mario Draghi, President of the ECB, at the “Room for discussion” of the Study Association SEFA and the Faculty of Economics and Business, Amsterdam,15 April 2013

Euro zone posts February trade surplus on lower imports – Reuters
Biggest ever euro area trade surplus – TradingFloor