The press conferences following the European Central Bank's monthly monetary policy decisions have been pretty uneventful as of late.
On every first or second Thursday of the month, ECB President Mario Draghi is happy to remind reporters at the ECB press conference just how in control of European sovereign debt markets the central bank is.
There have been no policy changes since August, when the ECB introduced its "OMT" bond market intervention program, which has convinced investors to buy Spanish and Italian bonds, sending funding costs for those countries to lower, more manageable levels.
"I think we’ve shown how to do it. And, basically, markets understood," Draghi told reporters in January regarding ECB monetary policy.
Yet the game has changed in the 28 days since the ECB's last meeting, and Draghi's press conference Thursday should be pretty interesting for the first time in a while.
There are two major items Draghi will need to address.
The first issue concerns the dramatic market movements we've seen in Europe since the January meeting. The euro has jumped approximately 3.6 percent against the U.S. dollar and 9.5 percent against the dramatically-weakening Japanese yen since the January meeting.
Many economists are concerned that this is a negative development for the euro area, which is already struggling to be competitive in global export markets.
The euro's move higher was initially spurred by Draghi's own words at the January press conference, when he told reporters that there were no requests on the ECB Governing Council to cut interest rates further – this after a lively discussion on cutting interest rates the month before. Markets took this as a sign of a possible shift toward a tighter monetary policy stance inside the central bank.
Since then, it's been driven higher by a few factors. For starters, the yen continues to weaken rapidly. Second, troubled banks in the European periphery who took super-cheap loans – known as "LTROs" – from the ECB during the height of the euro crisis are now, for the first time, able to pay them back.
Those banks jumped at the opportunity to repay the loans, and it's been mostly received as a positive sign that bank funding markets in the euro-area periphery, or the "non-core euro zone," are being repaired and investor confidence is returning.
Citi rates strategists, however, suggest that the situation is just the opposite. In a note to clients, they write:
Peripheral banks on the other hand remain in need of the liquidity (as are their economies). Our economists are not at all confident that non-core banks would be able to fund themselves sufficiently cheaply without the ECB, not least because it accepts such a wide-range of collateral. However, these banks are eager to demonstrate their health by repaying.
The obvious inference is that non-core banks judge the reputational risk of not repaying as greater than the risk of using shorter term sources of ECB funding (1- week, 1-month, and 3-month refinancing operations) if required. However, we have been surprised not to have seen this shorter funding taken up, e.g., the 3m LTRO, so far.
Whether this is understandable bravado, or a deliberate calculation that a strong gesture will pay off via improve funding conditions is uncertain. What is more certain is that to the extent that liquidity is required, this is not a cost free exercise. It is extremely unlikely that banks can replace ECB funding at 75bps with anything cheaper (especially if unsecured).
So, it will be important to gauge Draghi's reaction to the LTRO repayments.
In a recent note to clients on Europe titled "Now We're Getting Worried," Morgan Stanley rates strategist Laurence Mutkin argued that the rise in short-term and safe-haven interest rates that have accompanied the risk rally in Europe is not a positive development.
Thus, Draghi's reaction is crucial, says Mutkin, who wrote:
In the near term, therefore, much depends on how ECB president Draghi responds to the recent rise in EONIA forwards at next week’s Press Conference.
Our economists doubt he’ll lean heavily against the rise in rates, but we hope he'll avoid the mistake his predecessor made in blithely characterizing the rise in EONIAs after the 1y LTROs’ expiry in 2010 as being no more than evidence of the improving health of the banks.
All of this is why Thursday, as in January, Draghi will once again have a chance to move markets with his words.
The second issue is political: the derivatives scandal that has one of Italy's biggest banks in need of a bailout and regulatory authorities under fire right in the final weeks of the Italian national election.
The bank, Monte dei Paschi, is under the supervision of the Bank of Italy, which Draghi headed from 2006-2011, when the alleged derivatives improprieties took place.
Reuters reported Monday that Draghi was indeed informed of doubts over Monte dei Paschi while at the Bank of Italy. However, the source that provided this information also told Reuters that it wasn't Draghi's responsibility.
The source told Reuters: " The inspectors are the only people responsible for initiating a sanctions procedure so if they don't find anything in the course of their inspection then it's not possible for the top management to start the process."
Nonetheless, Draghi will undoubtedly face questions regarding the Monte dei Paschi scandal, and given the bank's association with the Italian left and the timing, just weeks before the election, it should be an interesting conversation.
So, today's ECB press conference could provide the first excitement from the central bank we've seen in quite a while.
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