How to Interpret an ECB Press Conference: April 4th, Annotated Highlights

5 Apr

Frankfurt am Main, 4 April 2013

To a large extent, subdued loan dynamics reflect the current stage of the business cycle, heightened credit risk and the ongoing adjustment of financial and non-financial sector balance sheets. At the same time, available information on non-financial corporates’ access to financing indicates tight credit conditions, particularly for small and medium-sized enterprises in several euro area countries…

To sum up, taking into account today’s decision, the economic analysis indicates that price developments should remain in line with price stability over the medium term.

We’re basically buggered. Most of the banks are still in full retreat, and even the few that want to lend can’t find anyone daft enough to borrow when there’s no demand for anything. Everybody’s scared and paying down debts, with the predictable result that basically nobody south of Munich still has a job. But the Germans run the show, so I still have to mention inflation, even though only a true psychopath would really worry about price stability in these circumstances, Jens.

As regards fiscal policies, euro area countries should build on their efforts to reduce government budget deficits and continue to implement structural reforms, thereby mutually reinforcing fiscal sustainability and economic growth. Fiscal policy strategies need to be complemented by growth-enhancing structural reforms. [..] To support employment, wage-setting should become more flexible and better aligned with productivity.

The floggings will continue until morale improves. Our only idea for growth is to give all the German MEPs little “Ask Me About the Hartz IV Labour Reform” badges and hope the word spreads.

I think one should always be mindful of what the ECB can do and what it cannot do. We cannot replace capital that is lacking in the banking system. That is quite clear. We cannot compensate for lack of action by governments

I’m not stupid. The problem is that we still haven’t really fixed the banks, and the governments are so strapped for cash that not only can they not fix their banks but they’re bilking their own citizens.

On Cyprus – I expect many more questions on Cyprus, so that I will only respond to your question narrowly, the fine question as to what the position of the ECB was. The ECB had presented a proposal that did not foresee any bail-in of insured depositors. [..] Then there were prolonged negotiations with the Cypriot authorities, represented at that meeting, the outcome of which was what you know, namely a levy also on insured depositors.

I knew this would come up. Not my fault. I warned them this would end in tears. We’re blaming the locals. oh and the Eurogroup.

That was not smart, to say the least, and it was quickly corrected in a Eurogroup teleconference on the next day. But that is what is past.

You know Raiders of the Lost Ark? That bit where the Nazis open the Lost Ark of the Covenant? That’s what I did to him.

Second, thanks to OMTs and to what I call the “positive contagion” in the financial markets that took place several months ago, we are now in a position to cope with serious crises without them becoming existential or systemic. It should also be kept in mind that there is now a very large liquidity surplus of €376 billion. To give you an idea of how markets have reacted to the events in Cyprus: today’s data show that TARGET2 balances continue to decline and that slightly less than 50% of the net amount injected by the LTROs has been repaid – proving wrong all those who thought that huge risks were taken with the LTROs.

Look at me. I’m great, I really am. Put defence in place so that not even the best efforts of idiot Cypriot politicians and their Brussels brethren have wider consequences. So we’ve stayed at Square One. Unfortunately that’s still not great: half of the net LTRO injection repaid? That means even when you ram liquidity down the banks’ throats, they still won’t pass it outside the financial Magic Circle.

I have not had chance to talk to the President of the Eurogroup,

He may not be very bright, but he’s not that stupid. But when I get hold of the little fecker…

let me stress that Cyprus is not a template! [...] Let me now share with you some of the lessons that have been learnt from this experience. First, the entering into force and implementation of the Single Supervisory Mechanism (SSM) is absolutely essential. There is no better way to prevent such crises than to shed light on the situation of the national banking systems through the sort of international oversight that would be provided by the SSM. This applies to Ireland, Spain, Greece and now Cyprus.

One thing we’ve learnt – don’t leave it to keen but underqualified provincial bureaucrats and hopelessly out-of their depth local politicians. We’ll be putting Germans in to keep a close eye on you peripheral wasters. Adult supervision is what you need.

the absence of ex ante rules gives the impression of an ad hoc approach in such situations, which is unavoidable in the absence of rules … There is thus a need for rules. The European Commission is the one that writes the rules, no one else. A draft directive is now under discussion in the European Council and the European Parliament that specifies a pecking order of the categories of asset holders that could be bailed-in. In this context, we would really like to see these rules enter into force, not in 2018 or 2019 as is envisaged, but much earlier, for example in 2015.

A combination of can-kicking, wishful thinking and making it up on the spot has landed us in the proverbial creek without a Bank Resolution paddle. There’s a real risk nobody in Europe will put their money in the non-German banks in case the chamber in Dijsselbloem Roulette comes up with a bullet. We’ve been dicking around for five years talking about maybe one day thinking of a plan to fix this dog’s breakfast; but even a genius like me is unlikely to be able to keep the lid on this mess for more than another couple of years, especially since Jeroen took his loudhailer out after reading that thing in Der Spiegel about “moral hazard”. And also that thing about Cyprus not being a template? The actual template is not, in fact, going to look all that different.

So this could also go ahead speedily. I am sure that the European Commission has done a splendid job on both accounts

You want to know how cool I am? I can say this stuff with a straight face.

On the other point about lagging behind in supporting the economy, let me mention what has been, in our sense, the most powerful monetary policy instrument so far: the OMTs. With the OMTs, the interest rates on a ten-year bond went down from 7.39% to 4.87% today for Spain, and from 6.45% to 4.52% for Italy, and in Germany interest rates on the ten-year Bund actually went up from 1.25% to 1.46% before the current uncertainty drove them down again.

Did I mention OMT? Great.Idea. Must have taken a real genius to put that idea forward. Just sayin’.

there is nothing in the market that says that the ELA is senior, but if you want to remain as a counterparty in the ECB’s monetary policy operations, it should certainly be treated as such.

You know Laiki Bank in Cyprus? We skinned the depositors and we haircut the creditors. Except one. All the money they owed us (technically the Cypriot Central Bank), even if they only borrowed it to cover losses in Greece, we get back. Laiki’s Emergency Lending Assistance gets moved across to the new, revamped Bank of Cyprus, along with the insured deposits. Those depositor haircuts would be a lot smaller if we played ball and just liquidated our collateral as, y’know, we agreed to do, but, as everyone knows, ELA collateral is rubbish, hence Emergency. So the choice is either admit that ELA is a transparent farce or Cypriots pay for losses in Greece – let’s face it, that’s no choice at all. Now, we don’t really have any obvious legal basis for doing this – as per my remarks earlier about ad-hoccery. But, in the end, your decision to screw with us should take into account how you feel about spending the rest of your life without kneecaps.

Recent experience shows that countries where the banking sector is several times larger than the economy are, on average, more vulnerable.

Well yeah. Especially if said banks are dumb enough to take our word for it when we say countries won’t be allowed to default and go on to buy up loads of their debt before it blows up.

Question: If you go back to a case like Northern Rock, where their problem was that they were reliant on wholesale funding, and then you look at Cyprus where they are apparently almost exclusively reliant on retail funding, should regulators be looking at balancing the two and say that banks should not be too reliant on one particular kind of funding?

Draghi: Certainly. It is also another detail that I think should be looked at.

The problem is not the distinction between wholesale funding and deposits, or between insured and uninsured deposits. The problem is that all these people – banks or depositors – insist on wanting their money back, and tend to scarper if they think that there’s a danger that a bank might go bust. So the ideal would be idiot-driven funding.

The Federal Deposit Insurance Corporation makes an explicit distinction between uninsured depositors which, in general, are not touched, and bond holders. I think that the same distinction should be present in the European Commission’s draft directive. I think this is another lesson we can draw from Cyprus.

I’ll just slip this massively important point in as an afterthought in a vaguely related question. US banks don’t depend much on wholesale funding, as they have a loan-deposit ratio of about 1. Our banks however, do. Nonetheless, I am going to mention in passing that we want to reassemble bank capital structures in a way that will disadvantage bondholders in favour of stampede-prone smaller depositors who really can’t afford to lose the money. Hope nobody notices!

Question: Mr Draghi, I have got a couple of questions from viewers at Zero Hedge. And one of them goes like this [yada yada]

Draghi: You are asking questions that are so hypothetical that I do not have an answer to them. However, I may actually have a partial answer. These questions are formulated by people who vastly underestimate what the euro means for the Europeans and for the euro area.

I got away with it! We impose capital controls on a member state of a so-called single currency and I only have to field content-free questions submitted by the tinfoil-hat brigade. Thank God that awkward German woman’s not here. This continent has the financial governance its press corps deserves.

15 Responses to “How to Interpret an ECB Press Conference: April 4th, Annotated Highlights”

  1. Windshielder April 5, 2013 at 9:10 am #

    Hahaha. Hilarious, concise, and accurate. Kudos to you, from the Land of the Rising QE.

  2. Philip Ammerman April 5, 2013 at 7:23 pm #

    Hilarious – well done!

  3. pontiff51 April 5, 2013 at 8:27 pm #

    As one of the sheeple from across the pond…great piece of work. Thanks.

  4. Amadean April 5, 2013 at 11:46 pm #


  5. dgrace April 6, 2013 at 12:56 am #

    “So the ideal would be idiot-driven funding.” – love it! Brilliant stuff as usual.

  6. Milton Arbogast April 6, 2013 at 11:51 am #

    I would have spelled it “ad-hockery”. It is a small point, but I think an important one.

    For the rest, I continue to believe that the real problem is France. France’s banks? CA actually *bought* a Greek bank before the storm hit. Cyprus ain’t in it.

  7. Milton Arbogast April 7, 2013 at 7:39 pm #

    I, as a fan, would like a blow-up of the favicon. I think that is only fair.

    • pawelmorski April 7, 2013 at 8:23 pm #


      • Milton Arbogast April 7, 2013 at 8:46 pm #

        The favicon is the 16 pixel by 16 pixel image that appears beside the name of the post/blog on the tab in Chrome and beside the address in other browsers. It is too small to be able to see detail.

      • pawelmorski April 7, 2013 at 8:54 pm #

        Ah. It’s also my twitter icon. You can get the file from Twitter. It’s a Japanese beer ad.


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